Franklin Templeton has reduced its Australian bond holdings. The fund anticipates more moderate interest rate reductions from the Reserve Bank of Australia than what the market predicts.
Recent employment and economic growth data suggest that there may be one or two rate cuts this year. In contrast, market pricing indicates a 76% probability of a rate cut in May, which the fund considers to be overly optimistic.
Reserve Bank Policy Expectations
This decision reflects a wider hesitation regarding how quickly the Reserve Bank of Australia will ease policy. Franklin Templeton’s outlook is based on resilient job numbers and steady economic expansion, which undermine expectations of aggressive rate relief. Market participants, on the other hand, have leaned towards anticipating an earlier adjustment, contrasting with the more measured stance taken by the fund.
McMillan, a portfolio manager at Franklin Templeton, has pointed to persistent inflation risks as another reason why monetary easing may not unfold as quickly as traders expect. He and his team have been assessing how price pressures remain embedded in key areas of the economy, despite a cooling in certain sectors. That supports the view that borrowing costs may stay elevated for longer than market participants are currently pricing in.
We have observed similar misalignments before—when traders factor in aggressive moves that ultimately do not materialise. This mispricing can create opportunities for those who correctly assess the pace of policy shifts. If inflation remains above target for longer than anticipated, the Reserve Bank may hesitate to move, catching out those who have leaned too heavily on expectations of rapid reductions.
Meanwhile, sovereign bond markets will be forced to adjust if the expected timeline for rate moves is pushed back. Australian yields could remain under pressure if traders unwind bets on imminent cuts, leading to potential shifts in short-term rate positioning. Investors who have been preparing for sustained easing may need to reconsider their allocations.
Market Positioning Risks
Lowe’s successor at the central bank has maintained communication that suggests a data-driven approach. If labour markets remain tight and consumer demand holds steady, the Reserve Bank may hold rates higher for longer, postponing relief that some have been positioning for. Every economic release now takes on greater weight in shaping these expectations, leaving room for rapid repricing if forecasts prove incorrect.
Those navigating rate-sensitive positions will need to weigh whether current valuations fully reflect the central bank’s likely path. Franklin Templeton’s latest adjustment suggests they do not share the prevailing optimism regarding the speed of policy changes. If they are correct, positioning that assumes early cuts could face headwinds as the year progresses.
