FIIG Securities says RBA rate cycle turn looks more likely in 2027

FIIG Securities Head of Research, Philip Brown, says investors may look to reduce overweights to Floating Rate Notes (FRNs) and increase allocations to fixed-rate bonds.

“As we said earlier this year, we continue to advocate being overweight inflation-linked bonds, however we think the time has come to start considering moving back out of FRNs and into fixed-rate bonds,” said Mr Brown.

“There should still be an allocation towards FRNs in almost all portfolios, of course. We continue to see value in inflation-linked bonds, as they are well positioned to perform in both of the scenarios we see as most likely. Inflation-linked bonds perform well if inflation does prove to be more sticky than anticipated. But inflation-linked bonds also perform well during a rate cut cycle since they are fixed-rate bonds as well as being inflation-linked.”

In FIIG’s July 2026 Macro Outlook, Brown recognises the RBA is likely approaching the end of its rate rise cycle, though there may be one more rise to come. Towards the end of the RBA rise cycle it is common for government bond yields to be underneath the cash rate.

“This is emphatically not what is happening now. Despite the cash market being quite convinced the RBA has at most one more rate rise, the bond yields (particularly the 10-year bond) are still significantly higher than the cash rate. If the cash rate is not going to rise this suggest that the current 10-year bond is providing excellent returns compared to a normal cycle,” said Mr Brown.

He notes that investors adding duration should do so with bonds that have relatively low credit risk.

“We would still advocate that clients take credit risk. However, we think that these risks should be taken in floating rate form and generally speaking in shorter bonds,” said Mr Brown.

“Because we think the RBA rate cycle will turn in 2027, but not necessarily soon, we think that it is appropriate to slowly accumulate duration. There will be opportunities to buy new seven-year and 10-year fixed-rate bonds in coming weeks and months and clients should remain alert for these opportunities.”

Brown said this is a move to a more standard portfolio – one that contains a moderate amount of duration and also contains explicit allocations to credit and to inflation-linked risk.