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“If at first you don't succeed, find out if the loser gets anything.” - William Lyon Phelps Cartoon of the Week Source: www.heraldsun.com.au Funds Snapshot Movers & Shakers (week ending 10th July): Stocks (ASX 200 ↓0.43%, S&P 500 ↑1.23%, NASDAQ ↑1.74%) Bond Yields (ACGB3Y 4.42%, ↑ 2 bps / ACGB10Y 4.84%, ↑ 4 bps) Bond Curves (A$ 3s10s +42 bps, ↑2 bps) Credit Spreads (Major Bank 5Y Senior +63 bps, ↓1 bps / Tier 2 +124 bps, ↔)) Oil (Brent US$76.01/bbl, ↑5.39%) Gold (US$4,119/oz, ↓1.36%) Soft Landing or Slow Puncture? Reading the US Data So Australia Doesn't Have To Executive Summary In a week light on Australian-specific releases, the dominant influence on domestic markets was the continued flow of US economic data — and its implications for the global rate outlook. The picture that emerged was cautiously reassuring without being definitively positive. The US services sector remained in expansion, with the ISM Services Index holding at 54.0 and services employment surprising to the upside. Jobless claims stayed well-controlled. Taken together, these readings suggest the US labour market is cooling gradually — consistent with the soft-landing narrative — rather than deteriorating sharply, as the previous week's headline payrolls figure momentarily implied. For Australian investors, the relevance of this week's data is indirect but real: US labour market conditions shape Federal Reserve policy, which shapes global risk appetite, the Australian dollar, and the relative attractiveness of Australian fixed income and credit. The week's data provides some reassurance that last week's alarming payrolls miss was not the opening act of a sharp US downturn. Market Overview The US services sector is the engine room of the American economy — it accounts for roughly 80% of GDP and an even higher share of employment. When the ISM Services Index holds at 54.0 (any reading above 50 signals expansion) and the employment sub-index surprises well to the upside at 51.2 against a survey of 48.2, it tells us that services businesses are still hiring and still growing. This is not what you would expect to see in the early stages of a genuine labour market contraction. The context matters: last week's non-farm payrolls figure of +57K was alarming at face value, but payrolls data is notoriously volatile on a month-to-month basis, subject to subsequent revision, and can be distorted by seasonal adjustment factors, weather events, and survey timing. The three-month average — which smooths out these distortions — sat at +111K, which is softer than the prior trend but not recessionary. This week's services employment beat and stable jobless claims data are consistent with a labour market that is moderating, not collapsing. Initial jobless claims of +215K — marginally below the +217K survey — are another important reassurance. This is a high-frequency, timely indicator of layoff activity. The fact that it remains well below the 300K+ levels typically associated with labour market stress tells us that US employers, despite hiring less aggressively, are not yet letting workers go at an elevated rate. The four-week moving average of +219K has drifted slightly higher over recent weeks but remains at historically comfortable levels. On inflation within the services sector, ISM Prices Paid fell from 71.3 to 67.7 — continuing the gradual moderation that began when energy prices retreated sharply in June. Services inflation is typically the most persistent component of CPI (wages are the dominant cost), so any easing in this measure is genuinely encouraging for the longer-term inflation outlook. It does not yet resolve the question of whether the Fed has done enough — core CPI remains at +2.9% YoY — but it is another data point pointing in the right direction. For Australian investors watching these developments from the other side of the Pacific, the week's US data is relevant in three specific ways. First, it reduces the probability of a sharp US recession — which would have significant knock-on effects for Australian commodity demand and financial market sentiment. Second, it keeps the US Fed's rate cut timeline broadly on track: cuts are now priced for later in 2026, but a services sector that is still growing and still hiring means the Fed is not under emergency pressure to act. Third, it reinforces the "higher for longer" dynamic that has been supporting income from Australian floating rate credit — if US and Australian rates stay elevated for longer, the income advantage of floating rate instruments persists. Equity Markets There were no major Australian-specific equity catalysts this week, so the direction of the ASX was primarily set by the offshore data flow and its implications for global risk appetite. The reassuring services data from the US — confirming the economy remains in expansion — would typically be supportive for equity markets broadly, reducing recession fears without eliminating the prospect of eventual rate relief. The nuance worth examining for local ASX investors is what a "moderate US slowdown" actually means for Australian equity earnings, as distinct from global sentiment. The US services sector remaining firm is not directly positive for Australian resource exporters, whose revenues are more closely linked to Chinese industrial demand and global commodity prices. The two most important external variables for Australian listed companies — Chinese growth and commodity prices — are not materially influenced by US services PMI readings. Last week's surprise Australian trade deficit ($3bn negative against a $2.2bn positive survey) is a more direct lead indicator for resource sector earnings, and that data has not changed this week. Domestically-exposed sectors of the ASX — financials, consumer staples, healthcare, and infrastructure — are more directly affected by RBA monetary policy, Australian employment, and domestic credit conditions. For these businesses, the relevant read-through from this week's US data is: the global rate cycle is turning, but gradually, and the RBA will take its own domestic cues before acting. The income and defensive characteristics of these sectors remain attractive in the current environment, particularly for investors managing to a yield or income objective. Valuation-wise, the ASX 200 at 8,779 at the end of June was modestly positive for the month. Without specific intra-week price data in this week's source material, we note that the global backdrop — stable services activity, easing price pressures, and controlled jobless claims — is consistent with the modest, grinding equity market gains that have characterised much of 2026 for non-technology indices. Another relatively quiet week ahead on the data front, just WBC Consumer Confidence, and NAB Business Conditions. Fixed Income & Credit The interplay between last week's payrolls miss and this week's services resilience creates a nuanced picture for fixed income markets. In the immediate aftermath of +57K payrolls, bond markets rallied on the assumption that a weaker labour market would force the Fed's hand. Last week's data — particularly the services employment beat and controlled claims — tempers that assumption without eliminating it. The net effect is likely a modest retracement of last week's bond market rally, with yields settling at levels that reflect a Fed on hold for now, with cuts possible but not certain by year end. For Australian government bonds, the domestic transmission of this dynamic runs through two channels. First, Australian and US bond yields have historically moved in sympathy over the medium term — they are not perfectly correlated, and Australia's own inflation and RBA policy trajectory ultimately dominate, but sustained movements in US Treasuries do influence Australian yields through global capital flows. Second, and more directly for the RBA, the US services data reduces the probability of a sharp global downturn that would force Australian rates lower more quickly. A gradual global moderation — the soft-landing scenario — is more consistent with the RBA taking its time, watching domestic trimmed mean CPI (currently 3.6%), and holding rates steady well into 2027. In Australian credit, this week's global data is quietly supportive. A services sector that is still growing and still hiring in the world's largest economy is good news for corporate credit quality globally, including in Australia. Investment grade credit spreads — which had been trending sideways in June — should find continued support from the reassurance that the US recession risk has not materially increased. For floating rate note investors, the message is a straightforward one: the income environment remains favourable. ISM Services Prices Paid continuing to fall (67.7 from 71.3) is good news for the inflation outlook over the medium term, but it does not signal imminent rate cuts. BBSW at 4.46% is likely to remain the base for floating rate income for several more months at a minimum, continuing to deliver compelling total yields relative to the cash rate and to fixed rate alternatives with similar credit quality. RMBS and securitised credit continue to be underpinned by the same domestic fundamentals that have supported this asset class throughout the tightening cycle: stable Australian unemployment (4.4%), residual household balance sheet resilience, and the structural undersupply of housing (reinforced by the latest building approvals data). The modest softening in US labour market conditions is not a direct threat to Australian mortgage credit quality — it is a global backdrop indicator. The more relevant domestic variable to watch remains the Australian employment data, due for the next major release in coming weeks. Outlook With Australian data thin on the ground this week, the outlook section focuses on what to watch over the coming fortnight — the specific releases and events that will most directly shape the environment for Australian investors. Australian CPI (Q2, due late July). This is the single most important upcoming data point for domestic markets. The RBA's rate decisions are anchored to the trimmed mean CPI, which sat at +3.6% YoY in May — above the top of the 2% – 3% target band. A quarterly CPI reading that shows trimmed mean accelerating would effectively rule out any rate cut in 2026. A reading that shows further moderation toward 3.0% – 3.2% (not expected until well into 2027) would meaningfully open the door to a cut in late 2026 or early 2027. There is no more important domestic number on the calendar. US CPI for June (due week of 14 July). Following the recent payrolls miss and last week's services resilience, the June CPI reading is the next piece of the puzzle. US headline CPI re-accelerated to +4.2% YoY in May. If June shows continued acceleration — or even a plateau — the Fed's ability to cut rates this year is materially constrained, regardless of the softer labour market. If the oil price decline from June flows through to lower fuel prices in the CPI basket, a moderation in headline is possible. Core CPI — which does not include energy — will be the more closely watched figure. Strait of Hormuz and the Iran ceasefire. The geopolitical situation remains the most significant tail risk in the current environment. A return to Hormuz disruption (which is what we have over the weekend) and sharply higher oil prices would reignite inflation, complicate central bank policy globally, and weigh on risk assets. The ceasefire negotiations between the US and Iran, mediated through Qatar, remain fragile and may in fact have collapsed completely. Any material development — positive or negative — would have immediate and significant market implications. Chinese activity data. For Australian investors, the most direct channel from global conditions to domestic outcomes runs through China. Industrial production, retail sales, and property sector data from China in the coming weeks will be the clearest signal on whether the external demand weakness visible in last week's Australian trade deficit is a transient phenomenon or a sustained trend. A genuine Chinese growth recovery would be significantly positive for Australian commodity exporters and the AUD.

“If two wrongs don’t make a right, try three” - Laurence J. Peter Cartoon of the Week Source: www.heraldsun.com.au Funds Snapshot Movers & Shakers (week ending 3rd July): Stocks (ASX 200 ↑0.24%, S&P 500 ↑0.58%, NASDAQ ↑0.05%) Bond Yields (ACGB3Y 4.41%, ↑ 5 bps / ACGB10Y 4.80%, ↑ 8 bps) Bond Curves (A$ 3s10s +39 bps, ↑3 bps) Credit Spreads (Major Bank 5Y Senior +64 bps, ↔ / Tier 2 +124 bps, ↔)) Oil (Brent US$71.66/bbl, ↓2.04%) Gold (US$4,196/oz, ↑4.49%) Labour Market Fault Lines: A Weak US Jobs Report Reframes the Rate Outlook Executive Summary Last week produced a set of Australian data releases that, taken together, present a genuinely mixed picture of the domestic economy. The most significant surprise was May's trade balance swinging to a deficit of $3.0bn — against a survey expectation of a $2.2bn surplus — driven by a 6.9% fall in exports and a 2.6% rise in imports. This is a material deterioration in Australia's external accounts and warrants careful attention. Against that, private sector credit growth accelerated to 8.2% year-on-year, PMI readings moved back into expansion territory, and the RBA released minutes from its June meeting that will inform the Board's thinking on rates. Internationally, the US June payrolls print — at 57K, roughly half the consensus forecast — was the dominant global event, raising the probability of Federal Reserve rate cuts later in 2026. This has meaningful implications for the RBA's own path, for Australian bond markets, and for the Australian dollar. For income-focused investors in Australian fixed income and credit, the environment remains attractive, but the policy signposts are beginning to shift. A quiet week ahead for local macro data. Market Overview Three domestic data points last week deserve some attention from Australian investors. The first is the trade balance, which surprised dramatically to the downside. The second is private sector credit growth, which surprised to the upside. The third is the PMI data, which confirms that activity — while not strong — has returned to expansion. These three pieces of data are not pulling in the same direction, and understanding the tensions between them is the key to reading the current Australian economic landscape. The trade deficit is the most jarring development. Australia has run consistent trade surpluses for much of the past decade, underpinned by strong commodity export revenues — particularly iron ore, LNG, and coal. A swing to a $3.0bn deficit, against a survey of a $2.2bn surplus, represents a $5.2bn miss relative to expectations. The primary driver was a 6.9% fall in exports — almost certainly reflecting the combination of lower commodity prices (Brent crude fell 21% in June, and other key export commodity prices have also softened) and weakening demand from China. This matters because Australia's terms of trade — the ratio of export prices to import prices — is a key determinant of national income, government revenues, and the Australian dollar's fair value. The import rise of 2.6% adds another layer of complexity. Rising imports in a slowing economy can signal two things: either businesses and consumers are still spending (a positive sign for demand), or imports are taking market share that would otherwise support local production. Combined with the export fall, the net result is a deterioration in the current account that, if sustained, would begin to weigh on the AUD and Australia's external position. Set against this, private sector credit growing at +8.2% YoY — and +0.7% MoM, slightly above the +0.6% survey — is a genuinely resilient number for a high-interest rate environment. Businesses and households are continuing to borrow, which speaks to underlying confidence and economic momentum. It also tells the RBA that financial conditions, while tighter than a few years ago, have not yet materially constrained credit activity. This is a two-edged observation: it is a sign of economic health, but it also reduces the urgency for rate cuts. The RBA released the minutes of its June policy meeting this week, with the underlying tone being a little more hawkish than perhaps pundits were expecting with the board agreeing that policy must remain restrictive as the economy continues to run with excess demand and inflation remains "materially" above target. Potential rate hikes remain in the table, although market pricing is less convinced (only 10 – 15 bps of hikes priced in). The board highlighted that labour and non-labour cost pressures remain widespread, and weak productivity growth continues to threaten the economy's supply capacity. Equity Markets PMIs recover, but trade data clouds the export sector outlook The return of Australia's composite PMI to expansion territory — final reading of 50.4 in June, up from the preliminary 49.8 — is a meaningful improvement and suggests that the worst of the domestic activity slowdown seen in mid-2026 may have passed. Services PMI at 50.5 and manufacturing at 51.5 both confirm that the expansion is reasonably broad-based, rather than concentrated in one sector. For equity investors, a PMI above 50 is typically associated with positive earnings momentum, particularly for domestically exposed businesses. However, the trade data introduces a clear negative for resource and export-linked equities. A 6.9% fall in exports in a single month is a significant move, and for ASX-listed companies whose revenues are denominated in export commodity prices — major miners, LNG producers, and agricultural exporters — the combination of lower prices and weaker volumes is a meaningful headwind to earnings expectations. This is particularly relevant given that resource stocks represent a substantial portion of the ASX 200 by market capitalisation. Building approvals falling 1.1% in May — against a survey of flat — continues a pattern of weakness in the residential construction pipeline. While private sector house approvals posted a solid 2.8% rise (partially recovering the prior month's 1.0% decline), the broader approvals data suggests the construction industry is not yet a source of positive economic momentum. For equities exposed to housing construction — building materials, diversified industrials, and REITs with development pipelines — the data remains cautious. The interaction between the weak US payrolls data and Australian equities runs through two channels. First, a US labour market that is softening reduces the probability of further Fed tightening, which is generally positive for global risk appetite and supports equity valuations. Second, a weakening US economy, if it deepens, could reduce demand for Australian goods and services — the same mechanism now visible in the trade data. Equity investors should be alert to both sides of this dynamic. On valuations, the ASX 200 remains reasonably well-supported relative to international markets, given its relatively higher weighting in financials and resources, and the absence of an expensive technology sector comparable to the US. However, if the trade deficit signals a structural shift in the terms of trade — rather than a one-month aberration — some downward revision to earnings expectations for the resource sector would be warranted. Fixed Income & Credit Australian bonds, credit resilience, and the rate cut question Australian 3-year ACGB yields rose 5 bps last week to 4.41%, while 10-year yields increased to 4.80% (+8bps WoW). BBSW held at 4.46%. The US payrolls miss last week adds further weight to the case that the global rate cutting cycle — when it arrives — may come sooner than previously assumed. The RBA's own path will be shaped primarily by domestic inflation data, but global forces are beginning to lean in the same direction. For Australian fixed income investors, the RBA meeting minute deserved a cursory perusal, nothing to significant for market to digest. PMI data also not really market moving. Instead, it is the interaction between the weak US payrolls print and what it implies for the global rate environment that probably occupied traders and investors minds. When the world's most influential central bank is pushed toward easing by a deteriorating labour market, the knock-on effects for Australian rates can’t be ignored. Australian bond markets, which had already rallied modestly in June on the back of the domestic CPI undershoot, will have continued to find support as global rate cut expectations repriced. The credit side of the ledger remains encouraging. Private sector credit growing at +8.2% YoY confirms that Australian banks' lending books continue to expand at a healthy pace, which is supportive of bank credit quality and, by extension, of Australian bank floating rate notes and senior unsecured paper. The Australian financial sector's credit fundamentals — capital adequacy, asset quality, and funding diversity — remain strong by both domestic historical standards and international comparison. For floating rate note investors specifically, the key question raised by this week is whether the income environment is beginning to turn. BBSW at 4.46% has been a stable and attractive base rate for floating rate credit portfolios throughout the period of RBA tightening. While the US might be closer to easing than hiking, local markets are pricing an unchanged RBA cash rate until the back half of 2027 at a minimum. In the RMBS and securitised credit market, the domestic backdrop remains fundamentally sound. Australian unemployment at 4.4% in May, private credit growing healthily, and PMIs back in expansion all point to a borrower population that, in aggregate, is managing its debt obligations. The trade deficit is a new and notable risk to monitor — if export income falls and unemployment begins to rise, the stress indicators in mortgage portfolios will bear close watching. For now, however, the picture is stable. Senior RMBS tranches, backed by high-quality residential mortgage collateral and structural protections, continue to offer attractive risk-adjusted income at current spread levels. Building approvals weakness is also relevant for the mortgage and RMBS market over a longer horizon. Fewer new dwellings being approved means tighter housing supply relative to demand, which typically supports residential property prices and, therefore, the collateral underpinning mortgage portfolios. From a credit perspective, this is a modest positive for existing RMBS and residential mortgage-backed structures. RBA Watch The case for the RBA holding rates steady remains strong. Trimmed mean CPI at +3.6% YoY is above the top of the 2% – 3% target band. Private sector credit at +8.2% YoY shows no sign of credit constraint – although with the proposed changes to Capital Gains Tax and Negative Gearing, we expect to see some slow down. Employment remains stable at 4.4% unemployment rate. Household spending data from May surprised to the upside at +5.5% YoY. Taken together, these readings suggest an economy with enough residual momentum to keep inflation above target without additional rate increases but not obviously requiring rate cuts either. The case for eventual easing is building, however. The global environment is shifting — a softening US labour market, declining commodity prices, a 21% fall in Brent crude during June, and China's uneven demand outlook all point toward a less inflationary global backdrop over the next 6–12 months. Domestically, GDP growth at +0.3% in the March quarter is below trend, and the trade deficit — if sustained — would reduce national income and export revenues. The PMI returning to 50.4 is encouraging, but hardly robust. Our assessment is that the RBA is likely to remain on hold through the balance of 2026, with the first cut becoming possible (bit not yet probable) in early 2027 if the domestic inflation data continues to moderate and the global growth picture softens further. A single month's trade data or a single US payrolls release does not change policy — but the accumulation of evidence is shifting in a direction that the RBA will need to acknowledge in its communications.

“Reminds me of my safari in Africa. Somebody forgot the corkscrew and for several days we had to live on nothing but food and water” - W.C. Fields Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 19th June): Stocks (ASX 200 ↓0.56%, S&P 500 ↓1.95%, NASDAQ (↓4.60%) Bond Yields (ACGB3Y 4.38%, ↓ 8 bps / ACGB10Y 4.75%, ↓ 6 bps) Bond Curves (A$ 3s10s +37 bps, ↑2 bps) Credit Spreads (Major Bank 5Y Senior +64 bps, ↓ 2 bps / Tier 2 +124 bps, ↓ 1 bp)) Oil (Brent US$80.57/bbl, ↓10.14%) Gold (US$4,155/oz, ↓2.36%) Mixed Signals: Growth Holds, But Inflation and Risk Sentiment Weigh on Markets Executive Summary Global markets delivered a divergent picture this week. Technology and growth-oriented equities retreated sharply — the NASDAQ fell 4.6% — as investors grappled with persistently elevated inflation, a weaker-than-expected US housing outlook, and renewed geopolitical pressure in Asia-Pacific markets. The Hang Seng fell 5.2% and South Korean KOSPI declined 7.1%. Meanwhile, fixed income provided relative shelter: Australian and US government bond yields fell meaningfully as the risk-off tone prompted a flight to quality. In Australia, a downside surprise in May CPI and a stronger-than-expected employment print created a nuanced backdrop for the Reserve Bank of Australia. Domestically, the data remains mixed — inflation is moderating, but core measures are sticky. For income-focused investors, this environment underscores the value of floating rate and short-duration credit exposure, where income generation remains resilient. Market Overview The dominant narrative: sticky inflation meets a growth reality check The week was defined by a collision between resilient US economic activity data and stubborn inflation readings — a combination that complicates the path toward central bank easing and pushed investors toward a more risk-averse posture. US Q1 GDP was revised up to 2.1% annualised, better than the 1.6% initial estimate, and Personal Consumption Expenditure (PCE) inflation for May came in at 4.1% YoY — well above where the Federal Reserve would be comfortable. Core PCE, the Fed's preferred inflation gauge, held at 3.4% year-on-year. These readings confirm that while economic growth remains decent, inflation is proving considerably harder to tame than markets had hoped earlier in the year. In Australia, the week's key data provided some modest relief on inflation but raised complexity around the employment picture. May CPI surprised to the downside at 4.0% YoY (survey: 4.3% YoY), though the trimmed mean — the RBA's favoured core measure — came in slightly above expectations at 3.6% YoY. Employment was resilient, with 40,300 jobs added in May, though the composition was skewed toward part-time work (35,200 part-time vs. 5,200 full-time). Household spending remained firm at 5.5% year-on-year, reinforcing ongoing consumption resilience despite a high-interest rate environment. Geopolitically, Asian markets bore the brunt of sentiment deterioration, with South Korea's KOSPI falling 7.1% — the sharpest move of any major index — reflecting heightened regional risk aversion. European markets were comparatively resilient, with the FTSE gaining 1.4% and the STOXX 600 broadly flat, suggesting that the risk-off pressure was concentrated in high-growth and Asia-Pacific exposures Equity Markets Tech leads the retreat; defensives and value offer relative shelter The most telling story in equities this week was the bifurcation between growth and value. The NASDAQ's 4.6% decline against the Dow Jones' modest 0.6% gain illustrates this starkly: investors rotated away from long-duration, high-multiple technology names toward more defensively oriented businesses with near-term earnings visibility. This rotation was directly triggered by the PCE inflation data. Higher-for-longer inflation expectations raise the discount rate applied to future earnings — disproportionately penalising stocks whose valuations rest on earnings many years into the future. Technology and growth stocks, which have led markets higher in recent periods, are most exposed to this dynamic. The ASX 200 declined a more moderate 0.73%, partly reflecting Australia's relatively higher weighting in financials, resources and real assets compared to global benchmarks. The domestic market also benefited from a softer inflation surprise, which tempered fears of additional RBA tightening. Asian markets were the outlier for risk sentiment. The KOSPI's 7.1% fall and the Hang Seng's 5.2% decline reflected both local growth concerns and the spillover from elevated global risk aversion. These moves are notable in magnitude and warrant monitoring — though it is too early to determine whether this represents a temporary sentiment-driven pullback or a more fundamental reassessment of regional growth prospects. On valuations, the question for investors is whether recent US and global equity levels adequately compensate for the risk that interest rates remain elevated. With core PCE at 3.4% and the Fed's target at 2.0%, there remains a meaningful gap — suggesting that equity multiples may need to compress further before a sustained rally can take hold. Fixed Income & Credit Bonds rally as risk-off tone provides flight to quality bid Government bonds performed their traditional defensive role this week. In Australia, 3-year ACGB yields fell 10 basis points to 4.36%, and 10-year yields eased 9 basis points to 4.72%. Similarly, US Treasuries saw 2-year and 10-year yields both fall 8 basis points. These moves were driven primarily by risk-off demand rather than any fundamental shift in the inflation or monetary policy outlook — a distinction that matters for how long the rally can be sustained. The yield curve in both Australia and the US remains somewhat inverted (shorter yields elevated relative to longer), reflecting markets' expectation that policy rates will eventually ease — but not imminently. The 3-year ACGB yield of 4.36% sitting below the 90-day BBSW rate of 4.46% tells a similar story: cash and short-duration instruments continue to offer competitive yield, reducing the urgency to extend duration aggressively. In Australian credit, the picture was nuanced. Floating rate note (FRN) spreads in the Australian credit market edged slightly wider — the AU Credit FRN spread moved from 56.88 to 57.33 basis points, a modest 0.79% increase. Fixed rate credit spreads, by contrast, tightened fractionally (76.47 to 76.22 basis points). This divergence is relatively contained and does not yet signal credit stress — it more likely reflects technical positioning and the relative supply-demand dynamics between the floating and fixed rate credit markets. For income-focused investors, the current environment continues to favour floating rate instruments. With BBSW at 4.46%, Australian bank floating rate notes and senior secured FRNs continue to offer attractive cash yields without requiring investors to take on material duration risk. Should the RBA move rates further, floating rate holders benefit automatically. In the RMBS and securitised credit space, the fundamental backdrop remains supportive. Australian unemployment at 4.4% is low by historical standards, and household spending data suggests continued debt-servicing capacity. While rising interest rates have compressed borrower buffers, the labour market remains the key variable — and this week's employment print was reassuring on that front. Currency & Commodities Oil’s sharp fall dominates; gold clips modestly; AUD under pressure Brent crude oil's 10.65% decline to $71.99/bbl was the single most dramatic market move of the week. This is a significant fall in a short period, and the driver appears to be a combination of demand pessimism — particularly given the risk-off sentiment from Asia — and concerns about the global growth outlook as sticky US inflation raises the spectre of a more prolonged restrictive monetary policy environment. A weaker oil price, if sustained, would provide a disinflationary impulse globally, which is modestly good news for central banks — though one week of oil price movement does not change the inflation trajectory. Gold fell modestly, down 1.61% to $4,089 per ounce. Gold's easing likely reflects some profit-taking following its elevated level — at over $4,000 per ounce, the metal has already priced in considerable uncertainty. A stronger US dollar environment, to the extent that risk-off typically supports the USD, creates a headwind for dollar-denominated commodities including gold. The Australian dollar weakened 1.65% against the US dollar to $0.69, reflecting a combination of general risk-off sentiment, lower commodity prices (particularly oil), and the ongoing interest rate differential between Australia and the US. The AUD also softened against the euro and British pound, suggesting the weakness was AUD-specific rather than purely a USD story. For Australian-domiciled investors with unhedged offshore exposures, a weaker AUD will have provided some offset to international equity losses this week. Outlook Navigating the higher-for-longer environment with caution and discipline The central tension in markets remains unchanged: economic activity is resilient but inflation is not retreating fast enough to allow central banks to ease policy with confidence. This week's data added evidence on both sides of that ledger — US GDP revised up, but core PCE stubbornly at 3.4% YoY. Until core inflation convincingly moves toward the 2-2.5% range, the Federal Reserve has limited room to pivot, and investors should not assume rate cuts are imminent. In Australia, the RBA faces its own version of this dilemma. May CPI at 4.0% is better than feared, and the downside surprise may reduce the urgency for an additional rate increase. However, trimmed mean inflation at 3.6% — above the RBA's 2-3% target band — and still-solid household spending and employment data suggest the Board will maintain a cautious, data-dependent posture. A rate cut from the RBA before late 2026 appears unlikely in the base case, though this remains genuinely uncertain. Key risks to monitor include: a further escalation in Asian geopolitical tensions, which could generate renewed volatility in regional risk assets; any re-acceleration in inflation data that would force central banks to communicate a more hawkish stance; and the possibility that the labour markets in Australia or the US weaken more sharply than current data suggest, which would shift the debate quickly from "higher for longer" to "cutting cycle imminent." The opportunity set in fixed income has improved considerably over the past two years. With government bond yields at multi-year highs and credit spreads at reasonable levels, the income available from well-constructed bond and credit portfolios is genuinely compelling relative to recent history. For investors with a medium-term horizon, the case for locking in yield — particularly through floating rate instruments that protect against upside rate risk — appears strong.

“No man has a good enough memory to be a successful liar” - Abraham Lincoln Cartoon of the Week Funds Snapshot Movers & Shakers (week ending 19th June): Stocks (ASX 200 ↑0.28%, S&P 500 ↑0.93%, NASDAQ (↑2.43%) Bond Yields (ACGB3Y 4.46%, ↑4 bps / ACGB10Y 4.81%, ↔) Bond Curves (A$ 3s10s +35 bps, ↓4 bp) Credit Spreads (Major Bank 5Y Senior +66 bps, ↔ / Tier 2 +125 bps ↔) Oil (Brent US$80.57/bbl, ↓7.74%) Gold (US$4,155/oz, ↓1.51%) State of Play Markets spent the week balancing two competing forces: evidence of continued economic resilience and a more cautious outlook from central banks. In the US, retail spending remained firm, labour market conditions stayed broadly stable, and manufacturing surveys improved modestly. However, housing activity softened, import prices accelerated, and the Federal Reserve's updated policy rate projections signalled a higher interest rate path than previously expected. For investors, the key takeaway is that the global economy continues to avoid a sharp slowdown, but inflation risks remain sufficiently elevated to limit the scope for rapid monetary easing. This environment remains supportive of income-generating assets and floating-rate exposures, while reinforcing the importance of maintaining diversification across asset classes. Economic data released during the week suggested the US economy continues to expand, albeit unevenly. Retail sales exceeded expectations across most measures, indicating that consumer spending remains a source of support for growth. Manufacturing indicators were mixed, with regional surveys showing improvement from recent lows, while industrial production was softer than expected. The housing sector remained a notable weak point. Housing starts fell significantly during May, while mortgage application activity also declined. Elevated borrowing costs continue to weigh on housing affordability and construction activity. Inflation pressures remain a central concern. Import and export price data accelerated materially, suggesting cost pressures are still present within global supply chains. While these figures are volatile, they reinforce the view that inflation may prove more persistent than markets had anticipated earlier in the year. The most important development was the Federal Reserve meeting. While policy rates were left unchanged, the updated dot plot indicated that policymakers now expect interest rates to remain higher for longer than previously forecast. This represents a modestly hawkish shift and highlights the Fed's continued focus on inflation risks. In our own backyard, the main event was the RBA policy meeting. The board unanimously voted to maintain the cash rate at 4.35%, while the Westpac Leading Index softened marginally, suggesting growth remains subdued but not recessionary. For the week ahead, we have a plethora of US data points, key amongst many are GDP (expected to remain flat) and inflation data (Core PCE, expected to drift higher). Locally, we have a couple of key data points coming out. We have inflation data, with CPI scheduled for Thursday. Consensus expect trimmed mean to be flat at +0.3% MoM, but drift higher annually, +3.5% YoY (vs +3.4% YoY prior). Headline CPI is forecast to fall -0.4% MoM, reflecting falling fuel prices. We also have labour data – also Thursday, with consensus expecting +30K vs -19K prior, and a modest drop in the unemployment rate to 4.4% from 4.5%. Equity Markets Equity investors continue to navigate a market environment characterised by resilient growth, elevated valuations, and uncertainty regarding the future path of interest rates. The stronger-than-expected US retail sales data reinforced confidence that consumer demand remains intact. This is supportive for corporate earnings and helps explain why equity markets have remained relatively resilient despite ongoing concerns around inflation and monetary policy. At the same time, the US Fed's revised interest rate projections serve as a reminder that monetary policy may remain restrictive for longer than markets had hoped. Higher discount rates generally place pressure on valuation multiples, particularly for growth-oriented sectors. For local equities, the backdrop remains mixed. Domestic growth indicators remain relatively soft, but stable employment conditions and a resilient global economy continue to support corporate earnings expectations. Investors remain focused on whether slowing economic activity will eventually justify monetary easing, or whether inflation persistence delays that outcome. From a valuation perspective, markets appear increasingly dependent on earnings delivery to justify current pricing levels. As a result, future economic data is likely to have an outsized influence on investor sentiment. Fixed Income & Credit The fixed income market remains focused on the timing and magnitude of future rate cuts, which are arguably expected to be a 2026 story, but rather a 2027 story - both in the US and locally. The US Fed met last week and left the Fed Funds Rate unchanged, as unchanged was widely anticipated. However, the upward revision to policymakers' rate expectations reinforces the view that inflation remains the primary policy concern. This is likely to limit expectations for aggressive easing in the near term. For bond investors, the environment remains one where income continues to be a significant contributor to total returns. While duration remains an important portfolio diversifier, elevated policy rates mean investors are being compensated more attractively for holding fixed income than has been the case for much of the past decade. Credit fundamentals remain broadly supportive. Stable employment conditions, continued consumer spending and the absence of significant financial stress suggest default risks remain contained. Investment-grade credit therefore continues to benefit from a relatively constructive backdrop. From a Mutual Limited perspective, floating-rate credit, bank senior debt and securitised credit remain attractive areas of the market. Higher policy rates continue to support running yields, while underlying credit fundamentals remain generally sound. Australian RMBS and asset-backed securities continue to benefit from strong structural protections, conservative lending standards and resilient labour market conditions. While household budgets remain under pressure from higher interest rates, arrears remain manageable by historical standards. For local markets, the main events to watch will be the macro prints. Any overshoot on the inflation front will reignite further rate hike calls. Market pricing on future hikes is somewhat indecisive, with a terminal rate at 4.50% vs current cash rate of 4.35%. A worsening of the labour market would ease future rate hike concerns. Currency & Commodities Commodity markets remain heavily influenced by inflation expectations, central bank policy and geopolitical developments. The stronger-than-expected US import and export price data reinforces the possibility that inflation pressures may remain elevated, which is supportive of maintaining a structural inflation risk premium across commodity markets. Gold continues to balance two competing forces. On one hand, persistent inflation and geopolitical uncertainty support demand for defensive assets. On the other hand, expectations that interest rates may remain elevated for longer increase the opportunity cost of holding non-yielding assets. Oil markets remain sensitive to both geopolitical developments and global growth expectations. Evidence of continued economic resilience supports demand expectations, while geopolitical events continue to influence supply-side risk perceptions. The Australian dollar remains largely driven by relative interest rate expectations, commodity prices and broader US dollar trends. Divergence between RBA and Federal Reserve policy expectations remains a key driver for currency markets.

“Life is pleasant. Death is peaceful. It’s the transition that’s troublesome.” - Isaac Asimov Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 5th June): Stocks (ASX 200 ↓0.08%, S&P 500 ↑0.39%, NASDAQ (↑0.45%) Bond Yields (ACGB3Y 4.56%, ↑8 bps / ACGB10Y 4.91%, ↑8 bps) Bond Curves (A$ 3s10s +35 bps, ↔) Credit Spreads (Major Bank 5Y Senior +67 bps, ↓2 bps / Tier 2 +125 bps ↓2 bps) Oil (Brent US$97.10/bbl, ↑5.49%) Gold (US$4,311/oz, ↓5.03%) State of Play Global risk assets largely consolidated over the past week as investors balanced optimism around global growth and AI-driven earnings momentum (in the US at least) against renewed geopolitical uncertainty in the Middle East and a firmer interest rate outlook (US Fed). The dominant narrative shifted from expectations of a near-term US-Iran peace agreement toward concerns that negotiations may be stalling, reintroducing energy supply and inflation risks into markets. Over the weekend we had further hostilities between Israel and Iran, although peace negotiations are apparently still ongoing. Strong US labor data last week triggered the first meaningful (more than 2.0%) daily downshift in US stocks since January. A stronger than expected jobs market has fuelled expectations the Fed’s next move will be a rate hike, not a cut. At this stage, no rate hikes are priced in. Equity Markets Global equities experienced heightened volatility last week as US labour market strength surprised to the high side, which reduced likelihood the Fed will cut rates anytime soon – with risk of hikes instead. Middle East peace negotiation wobbles also put the jitters into investor’s risk appetite. Without a lasting peace deal the Strait of Hormuz remains largely shut, which will keep oil prices elevated and continue to act as a tax on household budgets. Overnight, US markets rebounded somewhat – despite continued uncertainty in the Middle East – fuelled by dip buyers in the tech space. Australian markets closed yesterday for the long weekend, but equities broadly underperformed global peers over the week (and YTD), reflecting the market's heavier exposure to financials, resources and domestic growth sectors rather than the AI-driven technology leadership evident in the US. Bond Markets Bond markets remained under pressure. Investors continue to grapple with the prospect of "higher-for-longer" policy rates as resilient economic data, elevated oil prices and persistent inflation risks reduce the urgency for central bank easing. Long-dated government bond yields remain elevated, reflecting concerns about inflation, fiscal deficits and increased sovereign bond issuance. Australian bond yields remained relatively elevated as investors continued to price a more hawkish RBA outlook than other major central banks, given ongoing concerns around inflation persistence and housing market resilience. Markets increasingly accept that the RBA is unlikely to cut rates in the near term, with some economists still debating the possibility of additional tightening if inflation expectations deteriorate further or energy prices remain elevated. The RBA continues to emphasise that inflation risks remain skewed to the upside, particularly given geopolitical uncertainty and oil market disruption linked to the Strait of Hormuz conflict. Same as last week. At this stage, one more hike is priced in (futures), most likely around year end. Consensus is mixed, torn between one more hike and no more hikes. Credit Markets Credit conditions remain constructive, with bank and securitisation spreads generally stable despite global volatility, supported by strong demand for high-quality income assets. Credit markets remain supported by resilient economic data and healthy corporate balance sheets, although valuations leave little room for disappointment should growth soften or geopolitical risks escalate. Currency & Commodities Brent crude experienced another volatile week, oscillating between peace optimism and renewed supply concerns. Early-week weakness reflected hopes for progress in US-Iran negotiations, but prices recovered as confidence in a near-term resolution faded and concerns resurfaced regarding shipping and security around the Strait of Hormuz. Brent is currently trading around US$94/bbl. Gold weakened over the week as stronger US employment data pushed bond yields and rate expectations higher. The traditional safe-haven bid from geopolitical tensions was largely offset by rising real yields and a stronger US dollar, highlighting that monetary policy expectations remain the dominant driver of precious metals.

Recent market cycles have challenged one of the most relied-upon assumptions in portfolio construction: that bonds will always provide meaningful protection when equities fall. Scott Rundell, CIO at Mutual Limited, explores why traditional defensive allocations may need a rethink in today’s uncertain market environment. Originally presented at Entireti’s Online Series, you can now view the video on demand (watch: 45 mins). CPD points are available for viewing the webinar on-demand. Click here to download the presentation slides.

“I may be only a fish and chip shop lady, but some of these economists need to get their heads out of the textbooks and get a job in the real world. I would not even let one of them handle my grocery shopping..” Pauline Hanson Cartoon of the Week Source: www.heraldsun.com.au Funds Snapshot Movers & Shakers (week ending 29th May): Stocks (ASX 200 ↑0.86%, S&P 500 ↑1.43%, NASDAQ (↑2.39%) Bond Yields (ACGB3Y 4.50%, ↓4 bps / ACGB10Y 4.86%, ↓6 bps) Bond Curves (A$ 3s10s +36 bps, ↑2 bp) Credit Spreads (Major Bank 5Y Senior +69 bps, ↔ / Tier 2 +127 bps ↔) Oil (Brent US$92.97/bbl, ↓10.21%) Gold (US$4,538/oz, ↑0.64%) State of Play The dominant market narrative over the past week was still the tension between geopolitical de-escalation hopes and inflation persistence risks. Markets have increasingly traded on the assumption that the worst-case Middle East energy shock may be behind us, but investors remain highly sensitive to oil prices, inflation expectations and the implications for central bank policy. The most important macro driver remains the evolving negotiations between the US and Iran regarding a ceasefire framework and the gradual reopening of the Strait of Hormuz (still pending). Earlier in the week, reports suggesting progress towards a draft agreement triggered a sharp fall in oil prices into the low-to-mid $90/bbl range as markets priced in improved energy supply expectations. However, optimism was quickly tempered by renewed military actions and ongoing disagreements over key conditions within the proposed framework. Fresh US strikes on Iranian targets late in the week reminded investors that a durable peace agreement remains uncertain. The second major narrative has been the ongoing debate around whether the US economy is slowing enough to allow the Fed to ease policy later this year. Recent data has delivered a mixed message. Manufacturing activity remains expansionary, and labour market conditions remain broadly resilient, although markets are increasingly focused on signs of gradual cooling in employment growth. Consensus expectations for upcoming payrolls remain modest. Meanwhile, inflation remains problematic. For markets, the key takeaway is growth has slowed enough to prevent fears of overheating, but inflation has not slowed enough to provide confidence that aggressive Fed easing is imminent. This has kept Treasury yields relatively elevated and limited the extent of equity multiple expansion despite strong risk sentiment. Australian markets continue to be driven by inflation and interest rate expectations rather than growth optimism. The RBA's latest forecasts remain uncomfortable. Headline inflation is expected to peak near 4.8% in mid-2026 and underlying inflation is forecast to remain above 3% until mid-2027. Meanwhile, consumer inflation expectations remain elevated. Retail spending data continues to signal a weak consumer backdrop, reflecting the pressure of higher interest rates and cost-of-living challenges. And then, we have uncertainty stemming from the Federal budget. This leaves Australia in a difficult position. Growth is sluggish (Q1 GDP data on Wednesday). Consumers remain under pressure and inflation remains too high. The result is a market that continues to price a relatively restrictive RBA compared with what many investors expected earlier in the year. Equity Markets Global equities have remained remarkably resilient. The prevailing market belief remains: the Middle East conflict will gradually de-escalate, global growth will slow but avoid recession, some central banks will eventually be able to ease policy, and corporate earnings remain sufficiently robust to support current valuations. That narrative has allowed major equity indices to remain near record highs despite elevated oil prices and persistent geopolitical risks. The challenge is that valuations remain demanding, particularly in the US, leaving markets vulnerable if oil prices remain elevated for longer, inflation proves stickier than expected, peace negotiations break down, and / or labour markets weaken more abruptly. The ASX 200 finished the week modestly higher, although trading conditions remained highly volatile and headline-driven. CPI printed a little lower than expected (headline), while the core figure was flat and still well-outside of RBA targets. Hikes remain a risk, which will weigh on household budgets, consumer spending, credit growth and sentiment broadly. Offshore, particularly US indices remain underpinned by AI optimism, with the S&P 500 and NASDAQ closing the week at new record highs. Bond Markets Bond yields again trended lower on peace hopes and ultimately easing inflationary tension (assuming oil prices continue to fall). Oil prices have fallen considerably from their war-peak, which was $118/bbl vs current prices (as I type) of $93/bbl. Current prices are 21% below post-war peaks, but remain 31% above pre-war levels, and the Strait of Hormuz remains effectively shut and peace negotiations clouded with uncertainty. Risks to inflation persist. With persistent inflation risks, bond yields are still elevated vs where they were pre-war. Three-year bond yields are at or around 4.50% today, which is ↓33 bps below war peaks, but also ↑27 bps above pre-war levels and ↑116 bps higher than they were this time last year. For ten-year yields, we’re at 4.86%, ↓26 bps below war-peaks and ↑22 bps above pre-war levels. Over the past year, yields are ↑60 bps higher. For the RBA, the policy outlook remains difficult. Markets increasingly accept that the Bank is unlikely to cut rates in the near term, with some economists still debating the possibility of additional tightening if inflation expectations deteriorate further or energy prices remain elevated. The RBA continues to emphasise that inflation risks remain skewed to the upside, particularly given geopolitical uncertainty and oil market disruption linked to the Strait of Hormuz conflict. Same as last week. At this stage, one more hike is priced in (futures), most likely by around November, but it’s not a slam-dunk with only +20 bps priced in. Consensus is mixed, torn between one more hike and no more hikes. Credit Markets Once again, not a lot of new insights or nuggets of wisdom. Ditto last week and the week before that. These periods happen, where spreads remain moribund really, that is “completely lacking vitality and progress.” Spreads continue to grind sideways with monotonous consistency, trading in a relatively tight range. Major bank senior spreads are hovering around the high 60 bps area for 5Y senior paper vs 71 bps for the past two primary deals done over the past couple of weeks. Tier 2 paper is steady at mid-to-high 120 bps, flat’ish on the week. Same commentary as last week with little movement in either direction. WBC priced a 3Y with 66 bps initial guidance – in line with the prior major bank 3Y senior. A strong book (~$5.4bn) saw final pricing tighten into 60 bps (vs 61 bps for the prior deal), with $3bn printed. With the nascent improvement in the ASX 200 – albeit lagging its US peers – it’s worth looking again at the yield relatives between stocks and credit. Earnings yield on the ASX 200 is inside the yield offering on floating rate notes (AusBond Credit Floating Rate Note Index). Floating rate notes are offering a 61 bp yield premium to the ASX 200 (5.26% vs 4.65%), a historically rare dynamic. The ASX 200 has offered 260 bps more yield – on average historically – than floating notes (see chart below). This suggests either the ASX 200 needs to correct considerably, or floating rate note spreads need to compress. Currency & Commodities Oil prices remained highly sensitive to developments in US–Iran peace negotiations. Early optimism surrounding a potential ceasefire and reopening of the Strait of Hormuz saw Brent fall sharply as investors reduced geopolitical risk premiums. However, progress towards a lasting agreement remains uncertain. Renewed military activity and conflicting signals from both sides led to a partial recovery in oil prices later in the week, highlighting the market's continued sensitivity to supply disruption risks. The key narrative has shifted from immediate supply loss concerns towards how quickly global energy markets can normalise. Even with a peace agreement, shipping, insurance and inventory rebuilding could keep a structural risk premium embedded in oil prices for some time. Gold traded largely sideways over the week, caught between geopolitical uncertainty and higher bond yields. While ongoing Middle East tensions supported safe-haven demand, elevated real yields and a firmer US dollar limited upside momentum. The market increasingly views gold as a hedge against longer-term inflation, fiscal and geopolitical risks rather than simply a short-term crisis asset. The key driver remains interest rate expectations. Sticky inflation data in the US reduced expectations for near-term Federal Reserve easing, placing upward pressure on yields and preventing a stronger rally in gold prices. Overall, gold consolidated recent gains, with investors balancing geopolitical risks against the prospect of higher-for-longer interest rates.

It is understandable that households with a mortgage would feel frustrated to see interest rates move higher just as inflation appeared to be easing. The Reserve Bank of Australia’s (RBA) recent decision to lift rates surprised some observers. From the RBA’s perspective, and for many market watchers, the logic is straightforward. Understanding that logic helps investors frame how portfolios should be positioned from here. Importantly, while higher rates pressure borrowers, they also increase income opportunities for investors, particularly with floating rate notes. Why the RBA Acted The RBA has two broad mandates; to conduct monetary policy in a manner that best contributes to price stability  and the maintenance of full employment  in Australia. “Full employment” is inherently imprecise and has no formal target, but the current unemployment rate is well below historical standards and generally regarded as consistent with a tight labour market.  By contrast, the RBA has an explicit inflation target of 2–3%, as measured by CPI.  While inflation has fallen meaningfully from its cyclical peak of 7.8% year-on-year, the RBA is concerned it may stabilise above target rather than continue declining. As such, inflation management remains the primary driver of policy settings, at least while the unemployment rate remains subdued. Three key factors appear to have driven the recent rate increase: First, inflation progress has stalled.  Price pressures eased earlier, but more recent data suggests inflation is proving “ sticky ”, particularly in services, rents and labour-intensive sectors. This raises the risk that inflation will remain above target for longer than desired. Second, the economy has been more resilient than expected . Household spending, employment and business activity have held up better than forecast, with government spending also increasing. A resilient economy gives the RBA room to apply additional restraint without immediately triggering a sharp downturn. Third, credibility matters.  Central banks are acutely aware of inflation expectations. If households and businesses begin to assume higher inflation is the new normal , it can become entrenched and significantly harder to reverse. A modest rate increase reinforces the RBA’s commitment to returning inflation to target. In short, the RBA judged that policy was not yet sufficiently restrictive to ensure inflation returns to target within a reasonable timeframe. The Bigger Picture for Investors This rate increase should not be interpreted as an attempt to engineer a downturn. Rather, it reflects a desire to complete the inflation adjustment and avoid the stop-start policy mistakes seen in past cycles. For income-focused investors, the key point is reassuring. Higher rates create more income opportunities and defensive assets once again offer meaningful yield. Over the long term, investment outcomes are driven less by predicting the next rate move and more by staying diversified and aligned with your risk tolerance.  As always, successful investing is about discipline, patience and consistency — not reacting to every headline.   What it means for Mutual’s Funds So how does this translate into portfolio positioning? Two metrics we report across our funds are Running Yield  and Yield to Maturity .  Running Yield  measures the income you earn today, that is the annual coupon or annual income divided by the current price.  It provides a snapshot of current income but does not account for any capital gain or loss at maturity. For example: Face value of the bond:          $100.00 Coupon:                                   5% so $5.00 per year Current Bond Price:                $95.00 Running Yield:                         $5.00 ÷ $95.00 = 5.26% Yield to Maturity  (YTM) represents the total annualised return if the bond is held until maturity. Yield to maturity calculations assume all coupons received over the life of the bond are reinvested at the same rate. Yield to maturity includes coupon income, capital gain or loss (difference between purchase price and face value) and the time value of money.  Turning to interest rate dynamics, the RBA sets the cash rate, which is the price of overnight money. The Bank Bill Swap Rate (BBSW) is the reference rate used to determine coupons on floating rate notes and reflects short-term funding costs. Because short-term funding costs closely follow the cash rate, BBSW typically moves in line with RBA decisions.   Three of Mutual’s four funds invest exclusively in floating rate notes. As the RBA increases rates, and as the BBSW adjusts accordingly, the coupons on these securities reset, typically every 30 to 90 days. As a result, portfolio income rises progressively as those resets occur – all other things being equal.  Since the most recent rate increase, running yields and yield to maturity across the funds have moved 6 – 10 basis points higher as coupons begin to reset. As further resets occur, we expect the full 25 basis point increase to be reflected in portfolio yields.  With the possibility of additional rate increases ahead, there remains further potential upside to portfolio income should policy tighten again.

We view private credit as a potentially valuable component of a diversified portfolio for investors seeking income and long-term capital appreciation. However, it is not a substitute for liquidity, nor is it risk-free. While the asset class can offer attractive income and portfolio diversification benefits, investors need to tread warily given broader risk dynamics and to fully understand said risks vs return prospects.   Recent developments have brought private credit back into focus. Regulatory scrutiny has intensified, early losses are beginning to emerge (particularly in parts of the US market) and concerns are growing around concentration risks, especially within software and technology-related borrowers. With an estimated 20% or more of private credit exposure linked to software firms, questions are being asked about the impact of AI-driven disruption on earnings, cash flows and refinancing capacity.   Against this backdrop, it is worth revisiting the key risks embedded in private credit and, in particular, examining how it compares with another income‑oriented asset class familiar to Australian investors: bank hybrids.   It is important to state upfront what while Mutual Limited’s investment team has extensive experience in private credit, the firm does not invest in private credit within any of its funds or third-party mandates, nor does it intend to do so in the future. The risk profile of private credit does not align with Mutual Limited’s broader investment philosophy, which prioritises liquidity, transparency and capital stability.   Key Risks in Private Credit   1. Limited Liquidity   Private credit investments are typically structured as loans and not traded on public markets.  Accordingly, secondary liquidity is heavily constrained, and investors often must accept their capital is committed for several years. While redemptions are sometimes permitted, they are limited typically to quarterly and only up to a small percentage of fund assets under management (AUM), say 5% - 10%.  Given this absence of tradability, redemptions are often funded from cash flows, which can be further constrained during periods of heightened market stress.   What does this mean for investors? Private credit is best suited for capital that does not need to be accessed in the near term. Investors must be comfortable with the possibility that capital may not be immediately available when markets are under stress.   2. Risk of Borrower Default   Private credit funds lend to companies that may not have access to traditional bank financing, typically firms not formally rated by the rating agencies and therefore considered sub-investment grade with a higher probability of default. These businesses are often smaller or more leveraged and if a borrower experiences financial difficulty, repayment may be delayed or reduced.    Recent research from UBS suggests private credit default rates could surge to 15% [1]  compared with prevailing estimates of 3% - 5% range.  For context, global default rates through the GFC peaked at 15.6% in 2009 [2]  While not all strategists share this view, the risk of materially higher defaults look to be rising. What does this mean for investors? While income payments are typically contractual, there is no guarantee they will always be paid. Losses are possible, more so than an investor would expect with investment grade public bonds.   3. Sensitivity to Economic Conditions   Private credit performance depends on the financial health of borrowers.  In stable economic conditions, loans generally perform well. On the other hand, during recessionary conditions, default rates can rise.    Monetary policy settings also matter. Higher interest rates increase borrowing costs and can strain already leveraged balance sheets, particularly for companies reliant on refinancing .   What does this mean for investors? Even if fund values do not fluctuate daily, economic slowdowns can materially increase risk beneath the surface.   4. Valuation and the Illusion of Stability   Valuation of private credit is amongst the dark arts.  Private credit is not exchange-traded, so valuation is typically model-based, not price-discovery-based. That creates structural differences versus public credit.  At a very high level, value equals the present value of expected future cash flows, discounted at a market implied yield. In theory, private loans are not priced daily on any exchange and any valuation updates are made quarterly.    What does this mean for investors?  Returns may appear smoother than public bond markets, but underlying risks remains. The bottom line is private credit valuation is model-based, spread-sensitive, impairment-driven, and typically slow-moving until credit stress becomes undeniable.   5. Manager Discipline Matters   Private credit is not a passive asset class. Underwriting standards vary, ongoing due diligence and experience navigating stressed situations is critical.  Some managers may take greater risk in pursuit of higher yields than others .   What does this mean for investors? Manager selection plays a significant role in outcomes. Poor underwriting decisions can have long‑lasting consequences in illiquid portfolios.   6. Fees and Expenses Private credit has an array of fees and expenses to be mindful of. They include management fees (~1.00% - 1.25%), operating expenses (~0.30% - 0.60%), performance fees (~0.50% - 2.00% or more), and potentially foreign currency hedging costs (~0.30% - 1.00%) where offshore exposure exists. Add this up and the estimated total cost drag of ~2.00% - 4.00% per annum.   What does this mean for investors?  Higher fees reduce net returns and must be carefully weighed against expected income. By comparison, public credit funds including Mutual’s own, typically have fee ranges in the 0.5% - 1.0% range.   Private Credit vs Bank Hybrids: Not a like-for-like switch   Ultimately, the greatest risk in private credit is not day-to-day volatility, but a sudden collapse in confidence.  Illiquid, model-valued assets with periodic redemption features can expose the gap between perceived stability and underlying credit risk when sentiment turns.  Defaults may rise, refinancing conditions tighten, or investors rush to redeem at the same time – I call this the George Costanza trade, “ women and children first, get out of my way .” Consequently, funds may impose gates, delay withdrawals or reprice assets sharply.   For retail investors, this means returns that appeared smooth can change quickly — and access to capital may not be immediate, when it is most needed. Private credit can play a role in diversified portfolios, but it should be approached with realistic expectations about liquidity, valuation transparency and the true downside risks in a stressed environment.   Anecdotally, many retail investors have been drawn to private credit as a replacement for their bank hybrids, particularly as APRA phases bank hybrids out as an acceptable form of capital, with an end date of 2032.  The challenge here is that this is not a like-for-like transition.  There is an illusion of symmetry between the two asset classes. Both are floating‑rate, offer higher yields than term deposits and are marketed to income‑focused investors. Beyond that, the similarities fade.   Bank hybrids are exposed to systemic banking stress and are sensitive to equity volatility but they are priced daily and traded on the ASX.  Private credit on the other hand is exposed to SME leverage and refinancing cycles. It’s sensitive to credit spreads and default clustering, while valuations adjust slowly, if at all.   What are the alternatives?   For investors seeking income with greater transparency and liquidity, there is a broad range of income‑generating funds underpinned by public credit markets. These securities are traded, priced daily and offer materially superior liquidity dynamics, while delivering return profiles comparable to bank hybrids. Mutual Limited offers two such strategies—the Mutual Credit Fund and the Mutual High Yield Fund—which may be considered hybrid alternatives for investors prioritising liquidity, transparency and capital stability. [1]  UBS Investment Bank Credit Strategy note (Sachin Ganesh et al.), February 2026; as reported by Bloomberg. [2]  Standard & Poor's.

With geopolitical tensions rising and oil prices moving higher, investors are once again navigating a more uncertain market environment. In this Market Check-In, John Clothier, Head of Distribution at Copia Investment Partners, speaks with Scott Rundell, CIO at Mutual Limited, about the key forces currently shaping markets. Their discussion covers: The potential impact of geopolitical events on markets Why oil prices and inflation remain key considerations for investors The outlook for interest rates What current conditions mean for liquidity and credit markets Despite recent volatility, the Australian credit market continues to function normally, with investors taking a more cautious approach amid ongoing uncertainty. Watch the full conversation for Scott’s latest market insights and his outlook for inflation, interest rates and credit markets.

What investors need to understand now, and what markets may be underestimating. Markets have a habit of creating confidence just as risks start to shift. 2025 was a good example. Inflation looked beaten. Rate cuts arrived. Asset prices responded accordingly. And yet, by year-end, investors were once again grappling with uncertainty around inflation, policy direction and global stability. As CIO at Mutual Limited, my role is to help translate market complexity into clear, practical guidance for investment teams, and where helpful, our clients. For investors generally, one of the most important truths in investing is that there is no single “right” portfolio for everyone. The way a diversified portfolio is positioned should reflect who you are as an investor — not just what markets are doing at any point in time. Risk, time and diversification: the anchors Two factors dominate portfolio construction. The first is risk appetite . It is your ability to tolerate volatility, particularly during periods of market stress when assets fall and uncertainty rises. The second is time horizon . Investors with long timeframes can afford to ride through short-term volatility in pursuit of higher long-term returns.  Investors closer to drawing on capital generally prioritise income, stability and capital preservation. Diversification sits at the centre of this framework. By combining growth assets such as equities with defensive assets like bonds, credit and cash, portfolios can be structured to balance risk and return appropriately. The exact mix will differ from one investor to another, but the underlying principle is consistent: your portfolio should be designed to help you achieve your goals while allowing you to stay invested with confidence through market cycles. 2025 in context: expectations drove outcomes 2025 was ultimately a year shaped by the interaction between monetary policy, inflation surprises, global growth narratives, and evolving geopolitical ‘normalities’. For Australian investors, returns across equities, government bonds and credit were driven less by single events and more by how expectations shifted over time, particularly around interest rates and economic resilience.  Local markets were also heavily influenced by offshore developments, with global monetary policy, US asset-market leadership, China’s uneven recovery and geopolitical risk all playing a decisive role in shaping local asset prices, sector performance and capital flows. For the most part, geopolitical machinations were just white noise, but heading into 2026, the signal is becoming more deterministic, with potential for heightened uncertainty and risk aversion. The dynamics of 2025 set the stage for 2026, where markets are likely to remain highly sensitive to inflation data, policy credibility, global growth momentum and the structurally evolving geopolitical landscape.  Interest rates and bonds: a year of reversal The year began with growing confidence the inflation dragon had been conquered and summarily slain, empowering central banks to begin easing policy settings. With domestic inflation within target, the RBA cut rates three times, reducing the cash rate down to 3.60%. This supported bond returns, lifted equity valuations, and provided a favourable environment for credit. Unfortunately, inflation was only playing possum. Structural headwinds (energy & housing) underpinned a resurgent inflation risk, forcing the RBA to pause its easing agenda and ultimately consider a full 180-degree pivot.  By late 2025, investors had largely abandoned all hope of further easing, and Australian bond yields rose sharply. This repricing weighed on rate-sensitive equities and reversed some earlier bond gains. Australian government bonds performed well in the first half of the year as rate cuts were delivered. However, the inflation surprise in the second half drove a sharp reversal, particularly in shorter-dated bonds. Higher expected government issuance following the Federal Budget also contributed modestly to upward pressure on longer-term yields. The result was a year where timing mattered, with bond returns strongest for investors positioned early in the easing cycle. Government bonds returned a modest +2.51% in 2025, moderately better than 2024 (+2.26% YoY) with bonds up +3.82% at the halfway mark before falling -1.26% over the second half as inflation resurfaced and an RBA policy pivot was priced in.  Between 2000 and 2025 government bonds have averaged +4.62%. The RBA is expected to begin hiking rates in 2026, with a strong case for the first hike coming at the next meeting (February) according to some market pundits. Personally, I think they’ll sit pat for the time being but expect the next move will be up when it comes.  Equities: resilient returns, rising risks The ASX 200 delivered modest positive returns in 2025, supported by strong bank earnings, dividend income and early-year rate cuts. Resources contributed intermittently, linked to commodity price movements and Chinese policy expectations. Performance, however, was uneven across sectors. Rate-sensitive assets such as REITs and infrastructure performed well early, then lagged as bond yields rose later in the year. Equity leadership shifted repeatedly as markets oscillated between optimism about growth and concern about inflation persistence. The local market also materially lagged offshore markets. Many strategists are cautiously optimistic about further gains in 2026, reflecting expected earnings growth (don’t they always), decent macro fundamentals and continued yield support from dividends, even if returns are more modest than in 2025. There’s a range of views with some strategists suggesting the market could rise moderately on multiple expansion or moderate earnings recovery, and others warning of volatility due to inflation or rate uncertainty. Strategists have the ASX 200 ending 2026 in the ~8,900 to 9,500 range (with variations around this depending on the firm and methodology). This reflects a modest upside outlook from current levels, with potential upside linked to earnings growth and global sentiment, balanced by risks from inflation, policy shifts and sector rotation.  At the time of writing, the ASX 200 was around 8,786, suggesting modest 2026-year end upside, somewhere between +1.7% YoY and +8.6% YoY. While the consensus view is for the index to close higher, caution is certainly warranted given valuations are elevated compared to historical averages.  The ASX 200 has risen +20.0% since April 2025, when the index had its last correction.  The index is less than 3.0% below record highs and is trading at a 21.0x forward PE ratio, well above historical averages (17.0x).  Markets are pricing a favourable outlook, suggesting earnings will grow into these PE levels.  Maybe, but there are potential bumps on the road ahead.  The earnings yield on the ASX 200 is modest at 4.77%, well down on historical averages of 6.40%.  Meanwhile, while the yield on 10-year government bonds is 4.78%, giving us an ‘Equity Risk Premium’ or ‘ERP’ of -0.01%, which is well below historical averages +2.70% (2005 to now).  This suggests an investor would earn a better yield from buying a ‘risk-free’ bond, with low-to-modest return volatility (1.21%) than buying equities, with materially higher return volatility (3.80%). Credit: consistency in an uncertain environment Australian credit markets have a reputation for generating steady returns, with only modest volatility, and 2025 kept that reputation intact.   Floating rate credit returned +4.97% YoY, outperforming fixed rate credit with +4.34% YoY.  Aside from the odd flare up, which are typically triggered by a global systemic shock, i.e. Trump’s tariff policies in April, spreads traded in a relatively tight range through 2025.  Throughout the year primary issuance was comfortably absorbed with no apparent indigestion, and underlying fundamentals remained robust – although as the Australian credit market is very much investment grade, and dominated by banks, this is par for course.  Liquidity conditions underpinned confidence, with Australia becoming a more meaningful market.  Strong growth in the structured credit market has contributed to this and given systemic changes to funding markets, the local market should continue to grow healthily. With equities trading near record highs amid growing uncertainty, many investors increased allocations to credit. History supports this approach. Case in point was covid, credit fell 2% - 3%, but still paid income, whereas equities fell 30% - 40% with many firms pausing dividend payments.  Short of some cataclysmic change in the geopolitical landscape, such as WWIII or something similar, credit spreads are expected to remain within a tight range through 2026. With the RBA expected to tighten policy at least once, possibly twice, floating rate credit should outperform fixed rate credit, providing steady income flows with minimal capital downside. What this means for investors This post is not about advocating for one asset class over another. It is about understanding relative value, risk and the trade-offs investors face.   Different investors require different outcomes. The right portfolio is one that aligns with personal objectives, risk tolerance and time horizon, and allows investors to remain disciplined through market cycles. Markets will remain uncertain. Portfolios should be built with that reality firmly in mind. For investors wary of downside risk, who favour income stability with minimal capital risk, floating rate credit could be you.  Broadly speaking, over the past 25 years, investment grade A$ floating rate credit (per the AusBond Credit Index) is the only asset class to generate positive annual gains every year and monthly has generated gains 94% of the time (fixed rate credit is 79% of the time). During tightening cycles, floating rate credit has outperformed fixed rate credit 78% of the time. For context, the ASX 200 has generated annual (calendar) gains 70% of the time and monthly 60% of the time.

We’re honoured to be named a finalist in the 2025 Zenith Fund Awards, in the Australian Fixed Interest category.   This recognition reflects our long-term track record of performance and reliability across ou r four investment strategies. A big thank you to Zenith Investment Partners for this recognition, and to the Mutual and Copia teams for your hard work and dedication. Zenith Investment Partners Pty Ltd ABN 27 103 132 672 AFSL 226872 Fund Awards issued 23 October 2025 are solely statements of opinion and not a recommendation in relation to making any investment decisions. Fund Awards are current for 12 months and subject to change at any time. Fund Awards for previous years are for historical purposes only. Full details on Zenith Fund Awards at https://www.zenithpartners.com.au/zenith-fund-awards-2025/