August 2025 Update from the Australia Trade Floor
Text on screen: David Orazio, Head of Distribution, Global Wealth Management
Welcome to this month's Trade Floor update. Today I'm joined by portfolio manager Adam Bowe.
Adam, since we last caught up, we've seen the Fed pause and the RBA cut rates again, consistent with our quarterly pace of rate cuts that we've been talking about since the back end of last year.
How has our view evolved?
Text on screen: Adam Bowe, Head of Australia Portfolio Management
Well, I think the RBA decision is very consistent, as you said, with our long held view that they’re on a quarterly rate cutting path. And that'll take the cash rate below 3% next year. So absolutely no change to our view in terms of the RBA.
Importantly, a cash rate at 3.6% is still restrictive in our view. And I think it's a view the RBA's finally coming around to. If you have a look at their forecast, they have inflation remaining roughly in the midpoint of their 2 to 3% target band now. And that's even assuming a cash rate that gets to 2.9% next year. And all of that growth only picking up to around 2% all the way out to 2027.
So certainly the outlook that they're communicating, I don't think is as rosy as equity markets would have you believe.
And the punch line for investors is I think that the RBA is far from done. The inflation's been annualising and it’s at the midpoint of their 2 to 3% target band for the last three quarters.
Growth remains below trend. We've got elevated global risks. So a cash rate that’s restrictive is I think increasingly hard to defend.
And it's not just the RBA as you said, the Fed paused last meeting. But when we look around the world, most developed market central banks still have cash rates that are restrictive. So we're expecting ongoing rate cuts from the Fed, the Bank of England, Bank of Canada, the RBNZ over the next few quarters.
Orazio: Now, with the backdrop that you've painted, a lot of things for investors to consider in terms of portfolio allocations, specifically in terms of fixed income allocations to their portfolios, how should they be thinking about it?
Bowe: Look, I think the main message is they've got to keep preparing their portfolios for lower cash rates every quarter. That's an exciting opportunity for the active fixed income landscape.
If you look at core bond fund returns in the last financial year they were really strong, high single digits.
And despite those strong returns, average portfolio yields still remain high. And that's because, if you step back from the daily noise, ten year yields over the last couple of years haven't actually moved that far.
We've got steeper curves, so short rates have come down. Long rates have gone up. And average yields at the portfolio level haven't changed that much. So it's still a really attractive opportunity.
So we’ve got a starting point of high yields, we’ve got steep curves, we've got elevated volatility, it's a fantastic environment for active fixed income.
So for investors looking to escape declining cash rates but don't want to take too much interest rate risk, there's really attractive opportunities in short term active fixed income funds.
And for investors looking to term out and lock in higher interest rates for an even longer period, the opportunity set in core bonds remains as attractive as we've seen in 10 to 15 years at least.
Orazio: Well Adam, thanks for your time, as always, really appreciate those insights.
Now, as you heard, as the developed market central bank easing cycle gathers pace, it's a great time for investors to capture opportunities across the global fixed income universe, to generate resilient income and hedge their portfolios against heightened volatility.
Now, within private markets, we're leaning into the opportunity across asset-based finance to generate resilient income with the added benefit of structural protection through collateral.
As always, if you'd like any further information or have any questions, please reach out to your PIMCO Account Manager.