Although it is tempting to assume that term interest rates move with the RBA cash rate, in fact, they tend to move much earlier in anticipation of the RBA rate cutting cycle, not in concert with it. This article uses some recent developments in the Australian market to demonstrate the point and to help investors consider when is the right time to buy fixed vs floating rate bond investments.
The RBA has already begun to cut rates this cycle, of course, with the result that the shorter-dated yields have already begun to drop. In fact, 3Y bond yields are now nearly 100bp below the peak, which is a large amount considering the RBA has only cut 50bp so far. But the markets don’t always react to what the RBA is doing.
It may come as a surprise to hear that the market doesn’t respond to what happens at any given point. Instead, the market reacts to the “new” part of any news, headline or announcement, not the totality of the announcement. So, for example, if the RBA is widely expected to lower rates by 25bp and duly lowers rates by 25bp, then there is no “news” there – what happened was completely expected. If everything that happened was completely expected, then there is no need for longer yields to change. This doesn’t apply to just one RBA decision, either. If the market expects the RBA to deliver a long sequence of rate cuts then the fixed rate parts of the market reflect that expectation, for as long as the expectation holds.
What’s been happening over the last few months in Australia is the individual RBA meetings have been very easy to predict in advance, but the totality of the RBA action over the coming year has been much harder to predict. That’s why the times where there have been significant movements in the bond yields have not been the same as the times where there have been actual movements in the cash rate. Take the RBA meeting in February, for example, where the RBA cut rates 25bp but sounded very reluctant to do so in all the accompanying commentary. The markets had been looking for more commitment to the cutting cycle so the RBA cut rates in February, but yields rose.
In April, the RBA left rates unchanged, largely as expected, but then the Trump “Liberation Day” tariffs hit the day after the meeting, causing large falls, because the tariffs were anticipated to cause large rate cuts in the future.
Finally, in May, when the RBA cut largely as expected, 10Y yields were already back to near their recent highs because the tariff war had greatly lessened in intensity and the likelihood that the RBA would cut rates in an emergency fashion was ebbing.
What’s changing is the markets anticipation for the entirety of the RBA cycle. See our second chart below. Even this past week, comparatively poor job ads data and a low reading from the Melbourne Institute CPI gauge has caused the RBA expectations to move lower.
Note, though, that between 31 March and 2 June the anticipated RBA rate in February 2026 has been as low as 2.71% and as high as 3.40%. It’s movements in that expectation that drive the front part of the Australian curve, not the individual RBA decisions.
This movement in yields does highlight something about the choice between fixed and floating rates and the RBA cycle. Yes, you can gain by locking in fixed rates before the RBA cycle, but that needs to be before the RBA cycle is anticipated, not before the RBA cycle starts. By the time the RBA cycle starts it is normally too late to achieve these gains. The distinction is subtle, but important. (It’s also why we suggested that clients seek to acquire duration both last year, in the LOCK strategy and this year, in the BOLD strategy, so that we could be ahead of the actual movement.)
But coming the other way, it also means that buying floating rate notes, even as the RBA is about to cut rates, isn’t necessarily silly. If the fixed rate market already fully reflects the anticipated rate cut, then there’s nothing to be gained by going fixed rate. Indeed, if the market is pricing 4 future rate cuts and only 2 future rate cuts are delivered, then yields will likely rise, even as the RBA cuts rates.
The current market pricing is quite aggressive, anticipating large chances of rate cuts at both of the coming two meetings. There’s a combined 44bp priced (which is just shy of two x 25bp = 50bp of course). The market seems to anticipate that the RBA will cut rates quickly in the near future, then maybe once or twice more over the balance of 2025, but that by the time we get to 2026 the rate cut cycle will be over. FIIG research has been advocating an understanding that the RBA cycle may be much more elongated than the market has wanted to price, with rate cuts continuing on occasion, into 2026 and possibly beyond.
But even as the RBA begins to cut rates, maintaining a balance between fixed rate and floating rate exposure is important.
It’s also critically important that you consider how long your fixed rate exposure is for, too. We have mostly been explaining the movements of the 3Y bond yield here. The 10Y movements are similar, but as you can see are not as linked to the RBA as the 3Y movements.
Even longer bonds, like the 30Y, do not react to the RBA expectations much at all, instead, they are set by the global price of long-term capital. At present, both the US and Japan are seeing significant requirements for 30Y government borrowing. As such, the yields on those bonds are rising, regardless of the short-term implications for Central Banks of this inflation print or that unemployment rate result.
We advise investors to carefully consider their duration exposure because it is usually very important to do so – and the times it’s not very important, it’s absolutely critical.