Firm anticipates fewer RBA rate cuts than market expectations, shifts strategy amid volatility
Global investment manager Franklin Templeton has scaled back its exposure to Australian bonds, expecting fewer interest rate cuts than current market forecasts suggest.
“We’ve gone from being more overweight Australian duration to less overweight,” said Andrew Canobi (pictured above), director of fixed income at the firm’s Melbourne office. He was referring to the portfolio’s sensitivity to interest rate changes.
According to Canobi, recent employment and economic growth figures indicate the Reserve Bank of Australia (RBA) may only deliver one or two rate cuts this year. While easing inflation allowed for a February rate reduction, further cuts will not be a “bungee jump lower,” he said in a Bloomberg report.
The RBA has warned against moving too quickly after making its first rate cut in four years, stating that aggressive reductions could undermine efforts to stabilise inflation within its 2-3% target range.
Despite this caution, major banks expect additional cuts. NAB forecasts four more reductions, which would bring the cash rate to 3.1% by early 2026. Commonwealth Bank of Australia (CBA) and Westpac project a rate of 3.35% by year-end, while ANZ anticipates just one more cut, lowering the rate to 3.85%.
Market pricing suggests a higher probability of rate reductions. The Australian swaps market currently reflects a 60% chance of three additional cuts this year, with a 76% likelihood of a reduction in May, according to Bloomberg data. However, Canobi said market expectations for a May cut “feels a bit high,” given the RBA’s data-dependent stance.
Franklin Templeton has trimmed its Australian bond holdings as it anticipates shallower interest-rate cuts in the nation compared with market estimates https://t.co/gXNVWR8CwQ
— Bloomberg (@business) March 17, 2025
Australian bond yields have remained rangebound this year, closely following movements in US Treasuries. Earlier this month, yields on 10-year Australian government bonds dropped to a 2024 low of 4.24% before stabilising. Canobi estimates fair value for the 10-year bond at around 4.5%, compared to its current level of roughly 4.41%.
While trimming its bond holdings, Franklin Templeton has increased its positions in Australian mortgage-backed securities and state government debt. The firm has also raised cash levels as part of a broader strategy to reduce risk amid expected market volatility, Canobi said.
The Franklin Australian Absolute Return Bond Fund has outperformed 88% of its peers over the past year, according to industry data.
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
