We Asked One of Australia's Top Investors About Interest Rates

With just two Reserve Bank meetings left in the year, will Australia see another interest rate cut before Christmas? Chris Bourke speaks with Adam Bowe, head of portfolio management at Pimco Australia, about what the latest inflation data means for the RBA’s next move - and whether borrowers can expect any relief soon.

They also unpack how bond markets are interpreting rate expectations, what makes this economic moment particularly tricky for the central bank, and why more retail investors are eyeing the bond market. Plus, Bowe shares how global forces, including the US Federal Reserve, could shape the outlook into 2026.

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Episode Transcript

Speaker 1 (00:01):
Will Australia get another rate cut and time for Christmas?
We put the question to one of the nation's biggest investors. Hello,
I'm Chris Burke, and welcome to the Bloomberg Australia Podcast.
I'm coming to you from Melbourne, where the city's gearing
up for a big horse race on Tuesday, or more importantly,
a public holiday. But while we take the day off

(00:23):
up in Sydney, the Reserve Bank will be hard at
work announcing its next rate decision. And today we're checking
in with an expert for a preview of what might
happen with rates next week and beyond. Adam bow is
head of portfolio Management in Australia for Pimco, and joins
me today. Adam, welcome to the podcast. Thank you for

(00:44):
having me. Adam. You're in Sydney, so next Tuesday is
just another day in the office for you.

Speaker 2 (00:49):
I expect that's right, just another day.

Speaker 1 (00:53):
So we had some we had some pretty ugly third
quarter inflation data flashing across the Blue Burg terminal on Wednesday.
That closely watched Trimm Demean number came and at one percent,
even higher than most people expected. Next week's rate decision
was always going to depend on this report. What makes

(01:13):
these numbers so critical for Tuesday, Adam.

Speaker 2 (01:17):
Yeah, you're right, Chris. It came in love firm and
then expected. You know. Important Why these numbers are so
important each quarter is we have a central bank, there
is a Bank of Australia and their job is to
keep inflation within two to three percent target band and
full employment. So this one came in much step firmer
than expected. As you said, one percent on the quarter,

(01:37):
but importantly three percent over the year on trimmed mean,
which is right at the top of the two to
three percent inflation band. You know, after a period of
fairly elevated inflation in Australia, quite uncomfortable print for the RBA,
I think.

Speaker 1 (01:53):
Yeah, So taking all that into account, what do you reckon?
What do you reckon Governor Michelle Bullock and her border
going to do on Tuesday?

Speaker 2 (02:02):
Look, I think that the inflation print has ruled out
another cut for the time being, you know that, I think.
You know, Michelle recently described their expectations as even a
point nine would be a material miss. So one percent
on the quarter, you know, is quite a miss for them.

Speaker 1 (02:21):
You know.

Speaker 2 (02:21):
Importantly, I think you know, trying to step back from
the meeting by meeting decisions from the RB A more
important for investors, I think is has the destination changed?
You know, what are they going to do over the
next twelve twelve months rather than meeting by meeting and
and on that front, you know, I think it's more
of a delay to the next cut than a cut,
than a hold, a sort of extended pause or there

(02:45):
are no more cuts to come. So we still think,
you know, on that front, the current policy rate at
three point six is tight, and we have we have growth,
it's below trend. The unemployment rate that's edging up, so
the RBA will take a little bit of time to
gather the evidence to get comfortable to cut.

Speaker 1 (03:05):
So markets they had already started to trim their expectations
of a Melbourne cut rate cut after Bullock's recent comments
just on Tuesday night, where she spoke about the challenge
of this sticky inflation that's hanging around even as the
jobless rate creeps higher. Look, how tricky is this balancing

(03:25):
act between jobs and inflation for the RBA right now?

Speaker 2 (03:29):
I think it's really tricky for at the moment because
they're telling us two different stories. We have a labor
market that's gradually softening, the unemployment rate is slowly ticking up,
but we've just had a period of one quarter of
inflation data that suggests it's firming. So that the two
parts of their objectives telling different stories makes it very

(03:51):
challenging for them at the moment. I think ultimately what
that means is they just keep policy on hold until
evidence builds in one way or the other. You know,
as I said, I think three sixties tight restrictive policy.
So I think keeping it elevated or keep it on
hold at a restrictive level for a little bit longer.
Just me is that growth and inflation will be a

(04:13):
little softer than we'd expected as we kind of peer
into next year as a result, and ultimately the evidence
will build for them to get comfortable in lowering rates
next year.

Speaker 1 (04:24):
So what do you reckon? Do you reckon we're going
to get a rate cut by Christmas?

Speaker 2 (04:29):
Not by Christmas? We have two meetings left, We've got
November and December. I think after that inflation report, they're
going to need more evidence then we'll get By December,
you know, we will get another employment report, We'll get
a monthly inflation report, but I think they're going to
need a little bit more evidence, So I think realistically
the first opportunity that they'll get to ease policy rates

(04:52):
to be early next year, probably February at the earliest.

Speaker 1 (04:55):
So look, Adam, you of course help oversee billions of
dollars and bond investments at PIMCO and Australia. Bond markets
are often seen as a window into where investors think
interest rates are headed, both both in the short and
long term. What are they telling us? What are those
markets telling us right now about Australia's economy and the
potential for more rate cuts, you know, especially following that

(05:18):
kind of hotter than expected data this.

Speaker 2 (05:20):
Week, So not too dissimilar to what I describe, probably
a little bit more, sorry, a little less in terms
of rate cuts and what I'm expecting market at the moment,
sort of following that really elevated third quarter inflation print.
Has the RBA on hold for the rest of the
year and then one more cut by May, so a

(05:42):
little bit less than what we would expect. We would
expect a policy rate through next year to get close
to the three percent, so two cuts at least, but
market market finishing this afternoon with on hold until next
year and just one more.

Speaker 1 (05:57):
Cut, so no mortgage relief for homeowners this year, at least.

Speaker 2 (06:03):
That's what the market says. We think, yeah, definitely not
this year. As I said, we think a little bit
more in the market, but market suggesting no relief for
another another six months. You know, we think, we think
a little bit a little bit more.

Speaker 1 (06:19):
And when we come back, we break down the world
of bonds and how every day investors can get into them.
So Adam, we don't often dive into the world of
bonds on this podcast, probably because it's traditionally seen as
as an area for more for big institutions rather than

(06:40):
every day investors. Look ause that starts starting to change
here in Australia.

Speaker 2 (06:45):
It is a little bit you know, I think for
a couple of reasons. You know, we've had a material
rise in interest rates that you know that that investors,
even outside of institutions, should see as a much more
compelling environment to be investing in bonds, and it's becoming

(07:05):
a little bit more accessful. It's been one of the
challenges in Australia just the accessibility outside institutional investors. You
know we I don't like equities and not exchange traded instruments,
so it's been a little bit more challenging to buy
for individual vests to buy bonds or invest in bonds,

(07:27):
and a lot of the time minimum parcel size has
been elevated, so for a corporate bond, for example, minimum
trade parcels can be as high as five hundred thousand dollars,
so it makes it out of reach for a lot
of individual investors. So the easiest way historically has been
through mutual funds through investment firms, and that's still very

(07:48):
attractive option. But more recently a lot of mutual funds
are listing their funds on exchanges, so instead of being
able to buy the bonds on the exchange, you can
buy the mutual funds on the exchange in ETF format.
So accessibility is certainly improved outside institutional investors in the
last few years.

Speaker 1 (08:06):
And what kind of what what kind of bonds are
being approving popular more and more popular with with retail
investors these days a.

Speaker 2 (08:14):
Broad range of bonds. Generally what's being listed on exchanges
is high quality liquid bonds, so usually portfolios comprised of
government bonds corporate bonds, more mortgage backed securities. So high
quality liquid bonds lend themselves to exchange traded in exchange
traded format because you know, at the end of the day,

(08:37):
the exchange traded funds have to be liquid investors buying
and sell units on the exchange every day. So high
quality you know, liquid bond portfolios, you know, are typically
avenues of interest at the moment.

Speaker 1 (08:52):
What does that mean if you're an everyday investor who's
who's curious about getting into bonds? What's I mean how
much money they need to get started?

Speaker 2 (09:00):
It very little. I mean, if you've got a brokerage account,
you know you can you can buy and sell just
as you can buy very small units of of equities
now you can buy and sell very small units of
exchange rated bond fund So you know, I think partal
side is probably you know a little different depending on
which one you're looking at, but you know, not too

(09:22):
different to you know, to the equity space now, which
I think is is very compelling.

Speaker 1 (09:27):
So why I'm all retail investors looking at getting into
getting into bonds right now?

Speaker 2 (09:33):
I think the starting point Chris is attractive yields are
starting yiels we had material rise in interest rates, and
so you know, starting yields are pretty strong predictors of
average returns over five years in bonds, and that's a
good place to start. The starting is also providing reliable
income and allowing you know, investors to lock in that income.

(09:54):
It's kind of the flip side of the opportunity we
had during COVID when we all had the ability to
lock our interests. Right, it's a low levels on our mortgages.
You know, we have the opportunity to lock higher interest
rates now in on our assets. And then the final
final reason investors looking at the asset classes is just
the diversification benefits. You know, you expect bonds to do

(10:15):
well and the risky party port followers aren't. And you
know it didn't work during twenty twenty two because our
inflation was so high. But in periods historically when inflation
is low and clos to central bank targets, bonds can
provide that diversity. So, you know, a few compelling reasons
why I think the asset classes is garnering more interest
s lately.

Speaker 1 (10:35):
So we're recording this on Wednesday, and there's another big
event for you. I guess overnight with the Federal Reserve
due to hand down. Well, everyone is expecting most people
are expecting a red cut. Look, you're constantly talking to
some of the biggest global investors. I take it, what's
what's the mood among them about the US economy right now?

Speaker 2 (10:58):
So part of the biggest into national investment firm, you know,
we have, we're heavily invested in the US. So certainly,
as we look over the next six to twelve months
in the US, we think I'm going to go through
a period of weaker growth. You know, where there was
a big growth was very solid in the first half
of this year in the US. Some of that was

(11:19):
just a pull forward of activity and anticipation of tariffs,
which will roll off towards the end of this year.
So certainly expecting further rate cuts from the FED as
we crest into next year, and their growth should stabilize
and start to improve through twenty twenty six. So a
series of rate cuts from here until the middle of

(11:40):
the next year and then we see you know, a
gradually improving growth outlook for the US.

Speaker 1 (11:46):
Does it still look like a good place? You know,
obviously most of us are invested quite heavily in the
US indirectly through through our superfunds, And I guess you know,
there's been a lot of talk this year, especially from
all the uncertainty of the tariffs, et cetera, and there's
a lot of there's been a lot of concern about

(12:08):
whether the US is still seen as a long a
long term solid investment or a reliable investment. I guess
what's what's your take on that?

Speaker 2 (12:18):
Look, it's a good question. There has been a lot
of talk about that. We've looked at the data extensively.
You know, a lot of talk about the US losing exceptionalism,
a lot of talk about a dedollarization of the world.
To be honest, when we look at the data, we're
seeing very little evidence of global investors selling assets, selling

(12:38):
US assets, very little evidence of US of global investors
selling US dollars. So well, there there's a lot of
talk in the media about that. I think, on average,
and we look at the available data, there's very little
evidence suggests any of that's happening. So certainly from our perspective,
you know, being bond investors, you know, we get our

(13:01):
four percent yield on a US Treasury at tenure treasury
is looking pretty reasonable at the moment, so certainly at
least in terms of fixed income, attractive place to invest.

Speaker 1 (13:11):
If you found today's conversation insightful, be sure to follow
the Bloomberg Australia Podcast wherever you listen, and check more
reading on Australia's economy and bond market on Bloomberg dot com.
This episode was recorded on the traditional lands of the
Warundry and Gadagal peoples. That was produced by Paul Allen
and edited by Ainsley Chandler. I'm Chris burg