July 2025 Update from the Australia Trade Floor
Text on screen: Lachlan Pullar, Account Manager
Hi, and welcome to this month's trade floor update. Today I'm joined by portfolio manager Rob Mead.
Rob, the RBA surprised the market by putting pause on interest rates this month. What drove their decision and have our views on where policy needs to get to changed?
Text on screen: Rob Mead, Co-head of Asia-Pacific Portfolio Management
Yes, you're right Lach, it was a surprise, the RBA did wrong-foot the market. It was fully priced for a 25 basis point cut. And they decided to leave the policy rate at 3.85. I guess when you're reading through the statement from the RBA, it appears that they needed a little bit more information around inflation. They wanted to make sure it was sustainably coming back into the target. So they were a little cautious.
But to answer your question, it does not change where we think the destination is for Aussie rates. We do think that the RBA will continue the path down towards neutral in August with another cut. And I think especially important for investors though, is where that terminal rate will end up. And we think it will start with the two.
It might take us 6 to 12 months to get there. It may be more of a quarterly cycle in terms of how the rate cuts come through. But when investors start to think about the eventual destination, it's probably going to start with a two rather than a three in terms of that policy rate.
Pullar: End of financial year has just wrapped up, and we saw a great 12 month return for fixed income as an asset class. What are our expectations for this moving forward over the next 12 months?
Mead: Yes you're right. It was a good year for bonds. It probably doesn't get enough attention. But the actual returns were in the 6 to 9% range. It shouldn't really come as a surprise to most bond investors, given that we've been talking about how straightforward the bond math is and almost 95% of expected returns from bond funds, or especially core bond funds, are explained by the starting yield.
And as you say, while central banks have started cutting rates, yield curves have actually steepened, which means that starting yields today remain attractive. So something like high fours to even potentially north of 6% as a starting yield, which is again a really good indicator for the potential returns going forward.
So when you think about that backdrop, you think about cash rates coming down, you think about equity markets especially, I don't think anyone thinks they're cheap. Maybe they're fair. Fair to expensive. Today remains a great opportunity for investors to still deploy capital into core bonds. And that window fortunately, even though we had great returns last year, remains well and truly open.
Pullar: Thanks, Rob. Really appreciate your insights today.
With attractive starting yields for high quality fixed income. We continue to believe now is an opportune time to be looking at this asset class, particularly in light of high-quality resilient income in the face of declining cash rates globally.
If you have any more questions or would like more information, please reach out to your PIMCO Account Manager.
Thank you.