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 that 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 looks 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 remain. 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, and 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 may 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.

“Every cloud has its silver lining but it is sometimes a little difficult to get it to the mint.” - Don Marquis Cartoon of the Week Source: www.heraldsun.com.au Funds Snapshot Movers & Shakers (week ending 14th August): Stocks (ASX 200 ↓ 2.94%, S&P 500 ↓ 0.80%, NASDAQ ↓ 0.66%) Bond Yields (ACGB3Y 5.00%, ↑ 25 bps / ACGB10Y 5.37%, ↑ 19 bps) Bond Curves (A$ 3s10s +37 bps, ↓ 6 bps) Credit Spreads (Major Bank 5Y Senior +70 bps, ↑ 2 bps / Tier 2 +127 bps, ↔) Oil (Brent US$104.61/bbl, ↑ 8.65%) Gold (US$4,349/oz, ↓ 1.83%) Market Overview The inflation repricing goes global, and Australia imports it. The week's defining fact is where the repricing came from. Australian three-year yields rose ↑25 bps to 5.00% in a week when the domestic data was uniformly poor. Westpac consumer confidence fell ↓5.2% in September to 84.4, reversing a ↑6.0% gain. NAB business conditions fell from +4 to -1, their first negative reading in this dataset, and confidence slipped to -8. Consumer inflation expectations remained stuck at 4.9%. Australian bonds did not reprice on Australian news. They repriced because they are priced in a global market, and three things happened offshore. First, US producer prices accelerated sharply. Final demand PPI rose to ↑5.4% YoY against ↑5.3% expected, up from a revised ↑4.8% YoY, with the core measure at ↑4.6% YoY from ↑4.3% YoY. Producer prices sit upstream of consumer prices, so this signals pipeline pressure rather than current inflation. The consumer data was better behaved, with headline CPI holding at ↑3.4% YoY and core easing to ↑2.4%. The pipeline is heating while the outlet cools, and we do not yet know which resolves. Second, the ECB raised rates — the deposit facility ↑25 bps to 2.50% and the main refinancing rate to 2.65%, both as expected. Until this week higher-for-longer was a market forecast; it is now an observed central bank action. The ECB also tightened into improving growth, with euro area Q2 GDP revised up to ↑1.2% YoY and investor confidence firming. Third, and least discussed, China stopped exporting disinflation. Chinese producer prices rose to ↑3.8% YoY against ↑3.6% expected, consumer prices to ↑0.8% YoY from ↑0.5% and core to ↑1.0%. For two decades Chinese factory-gate deflation was a persistent disinflationary force in global traded goods that Australian and US inflation benefited from without anyone arranging it. That channel has reversed, and with exports ↑25.0% YoY and imports ↑28.2% this is not weak demand but a genuine change in the cost of the goods the world buys. Add Brent up ↑8.65% to US$104.61 and the picture is complete. The dominant narrative is therefore a change in the inflation regime rather than another data point within it. Energy, Chinese producer prices and US pipeline costs moved in the same direction at once, and a central bank acted. That is why bond markets repriced the entire curve rather than the next meeting, and why Australia was carried along despite domestic evidence pointing the other way. For Australia this is the uncomfortable combination, and we need to revisit a view. Three weeks ago we described Australia as drifting toward a stagflationary configuration. Last week we withdrew that after the GDP beat. This week we raise it again, and we should be transparent that this is the second revision in three weeks. The data does not contradict itself: GDP measured the June quarter and was backward-looking, while confidence surveys are September readings and forward-looking. Surveys lead, national accounts lag, and both can be right about different moments. What has changed is the mechanism. The earlier concern was domestic demand keeping core inflation elevated; the concern now is an external shock arriving as domestic confidence deteriorates. That is the harder version, because the RBA cannot influence the price of oil or Chinese factory-gate prices — its only instrument works on domestic demand, which is already weakening. Oil – Brent rose ↑8.65% to US$104.61 per barrel, following a ↑7.80% rise the previous week, for a two-week gain of roughly ↑17% and a twelve-month gain of ↑57.6%. With the conflict in the Middle East persisting and no apparent off-ramp, energy prices are unlikely to come off any time soon, remaining a persistent inflation and growth headwind. Equity Markets There was nowhere to hide — every major market we track finished lower, led down by the Hang Seng at ↓3.30% and the ASX 200 at ↓2.94%. Australia was the worst performer in the developed world, for a reason we have flagged for five consecutive weeks. The equity risk premium had compressed to roughly 16 bps entering the week, leaving no valuation cushion between Australian shares and government bonds, so when the ten-year rose 19 bps there was nothing to absorb it. The market with the thinnest risk premium has the most to lose when the discount rate moves. We would stress this was an observation about the absence of a cushion rather than a forecast of a shock: we did not predict the repricing, only that Australian equities had no protection if one arrived. The arithmetic has worsened again, and the twelve-month record has crossed an important line. The ASX 200 trades on 18.3x forward earnings for an earnings yield of 5.47% against a ten-year bond at 5.37%, an equity risk premium of approximately 10 bps and a fifth consecutive week of compression from 33 to 27 to 18 to 16 and now 10. Over twelve months the index has delivered a price return of -0.72%. With a 3.53% dividend yield the total return is roughly +2.80% before franking, against a cash rate of 4.35% that carried no volatility at all. Franking improves the comparison for domestic investors and we would not dismiss it, but the plain statement is that an investor who accepted full Australian equity risk for a year has been paid less than one who did nothing. US markets held up comparatively well because core CPI eased to ↑2.4% YoY, so US equity investors received a better consumer inflation signal than bond investors received from producer prices. Even so, the NASDAQ at 29.6x against a ten-year Treasury at 4.97% is the tension we flagged last week, and it has begun to resolve against valuations. Dispersion remains wide — the S&P 500 on 21.3x, the ASX 200 on 18.3x, the STOXX on 15.4x and the Hang Seng on 11.4x — but the Hang Seng cautions against treating cheapness as an entry signal: already the cheapest major market, it fell furthest this week and is down 4.91% over twelve months. Fixed Income & Credit Australian government bonds and the RBA – three-year yields rose ↑25 bps to 5.00%, five-year ↑25 bps to 5.04% and ten-year ↑19 bps to 5.37%, with swaps in line. Every one of those levels is a one-year high, as is three-month BBSW at 4.67%. The curve bear-flattened to 37 bps from 43 bps, and short yields rising faster than long yields is the classic signature of an inflation scare rather than a growth upgrade. The three-year now sits 65 bps above the cash rate and BBSW 32 bps above, up from 24 bps, so market pricing embeds a meaningful expectation of tightening. The RBA did not meet and the cash rate is unchanged over the month, quarter and year, however futures are now pricing a cash rate at 5.00%, suggesting almost three hikes left in the cycle (not our base case). We will not forecast, but we will describe the position plainly: the RBA faces an imported inflation shock it cannot influence arriving as domestic confidence deteriorates sharply. That is the hardest configuration a central bank can face, and it is why we would caution against positioning aggressively for either outcome — pricing has travelled a long way in one direction, which makes it vulnerable in both. US Treasuries – the two-year rose ↑26 bps to 4.63% and the ten-year ↑18 bps to 4.97%, flattening the two-to-ten-year curve to 34 bps from 42 bps and reversing the prior week's steepening. The front end led because that is where policy expectations live. We flagged last week that a bear steepening said growth is holding while inflation repriced further out; this flattening says attention has moved back to near-term policy. Against it, core CPI easing to ↑2.4% and NY Fed inflation expectations easing to 3.58% are genuine counter-evidence. Producer and consumer prices point in opposite directions, and we would not pretend to know which wins. Investment grade credit and Australian bank paper – this was the reassuring part of the week, with floating rate credit widening 1.1 bps to 61.5, fixed rate 0.6 bps to 79.5, major bank senior 2 bps to 70, and Tier 2 unchanged at 127. Credit barely moved while government yields rose ↑20 – 25 bps and equities fell around three per cent, and the reason is worth explaining carefully. A credit spread compensates for the risk that a borrower does not repay, and nothing this week suggested rising default risk: job advertisements rose 2.5%, US initial claims held at 206,000 and continuing claims fell. What repriced was the risk-free rate, the price of time and expected inflation, which is a different question entirely. This is the clearest illustration in months of why credit and government bonds are distinct instruments rather than variations on the same one. One caution. Senior spreads are 7 bps wider over the month and now sit 7 bps above their one-year tight, so the drift is persistent rather than absent, and credit may be lagging the rates repricing rather than immune to it. The subordination premium compressed further to 57 bps against a one-year average near 64 bps, reinforcing our existing view: at approximately 6.56% all-in, Tier 2 is attractive in absolute terms, but the case rests on that absolute yield rather than on relative value. What this means for income-focused investors – the arithmetic improved again, and for the right reason. Floating rate credit now yields approximately 5.28%, major bank senior 5.99% and Tier 2 6.56%, levels that rose ↑8 – 24 bps over the week driven almost entirely by higher base rates rather than wider spreads. Income investors were paid more without taking more credit risk. The comparison we would put on the table is floating rate credit at 5.28% against an ASX 200 dividend yield of 3.53%: credit pays roughly 175 bps more than the share market, ranks ahead of equity, and carries a fraction of the volatility — as this week showed, with shares down 2.94% while spreads moved a single basis point. Outlook The central case. An inflation regime change is underway, driven by energy, the reversal of China's disinflationary exports and accelerating US producer costs. Developed market policy rates stay at or above current levels, with the ECB having already moved. Growth globally is adequate while Australia deteriorates in forward-looking measures. We attach the highest probability to this scenario while acknowledging the evidence within it is genuinely conflicting. Key risks. The one we weight most heavily for domestic portfolios is imported stagflation in Australia, for the reasons set out above. Second, the equity valuation cushion is gone — with the risk premium at roughly 10 bps and the ten-year at a one-year high, nothing stands between Australian equities and a further de-rating if yields rise again. Key opportunities. Income is the clearest, and it improved this week through higher base rates rather than deteriorating credit quality. Government bonds at one-year-high yields now function as genuine portfolio insurance rather than a drag, and equity valuation dispersion remains wide — though this week was a reminder that cheapness alone is not a catalyst. Central banks. The ECB tightened into improving growth, which is the comfortable version. The Federal Reserve faces producer prices at ↑5.4% against core consumer prices easing to ↑2.4%, conflicting evidence we would not predict a response to. The RBA faces the hardest position of the three. Inflation and growth. Inflation risk has shifted higher and the source has broadened: energy is now joined by China, and if the withdrawal of that long-standing disinflationary subsidy persists it matters more than any single central bank decision, because it changes the starting point from which all of them must work. Growth is adequate globally — Europe revised up, the US labour market stable, Chinese trade strong — leaving Australia the outlier on the downside, a reversal of the picture we described only last week. What would change the narrative? A sustained retreat in crude, though we set that bar at US$85 last week and the price moved twenty dollars the other way, so we would treat any single threshold with humility. A US producer price reading that fails to pass into consumer prices would reverse the front-end repricing quickly. And an Australian labour market that confirms the confidence surveys would flip the RBA conversation back toward cuts and reward duration sharply from a one-year-high starting yield..

“Expert: a man who makes three correct guesses consecutively.” - Laurence J. Peter Cartoon of the Week Source: www.heraldsun.com.au Funds Snapshot Movers & Shakers (week ending 14th August): Stocks (ASX 200 ↓ 0.95%, S&P 500 ↑ 0.09%, NASDAQ ↑ 0.40%) Bond Yields (ACGB3Y 4.75%, ↑ 9 bps / ACGB10Y 5.17%, ↑ 8 bps) Bond Curves (A$ 3s10s +43 bps, ↓ 1 bp) Credit Spreads (Major Bank 5Y Senior +67 bps ↓1 bop/ Tier 2 +127 bps, ↔) Oil (Brent US$96.28/bbl, ↑ 7.80%) Gold (US$4,429/oz, ↓ 0.56%) Executive Summary Australia's June quarter GDP grew +0.4% YoY, lifting annual growth to +2.1% YoY against a +1.8% YoY consensus. US payrolls added 162,000 jobs against 55,000 expected, with prior months revised up by 55,000. The growth scare that shadowed August has faded, and with it much of the case for near-term rate cuts. Yields rose accordingly. Australian yields rose 8 – 9 bps across the whole curve, and the US ten-year rose 6 bps. Unlike the prior week, the long end moved too. That reflects a repricing of inflation and growth, not merely the timing of the next central bank meeting. Brent crude rose 7.8%, complicating the inflation picture further. Equities finally took notice, with the ASX 200 down 0.95%. For income investors the arithmetic keeps improving: investment grade floating rate credit now yields approximately 5.20%. Market Overview The growth scare fades, and the inflation problem gets harder Last week we flagged genuine downside risk to the June quarter GDP print. It did not materialise, and we should say so plainly. GDP grew +0.4% for the quarter against +0.3% expected, with annual growth at +2.1% against a +1.8% consensus. The composition matters more than the headline: net exports added +0.1 percentage point, inventories subtracted, and company operating profits rose +1.8% after a revised -1.5% fall. With business investment contracting, growth had to come from somewhere, and the prior week's household spending figure of +7.0% tells you where. Australia's problem is therefore simpler than we described a week ago, and not obviously better. It is not a stagflation problem; it is an inflation problem in an economy that is still growing. The Melbourne Institute's monthly gauge accelerated to +4.8% annually from +4.0%, private sector credit grew +8.4%, and the composite PMI rose to 52.7. Credit expanding at more than eight per cent alongside a services sector in solid expansion is not what a genuinely restrictive policy setting produces. The counterweight sits in housing supply, with building approvals down -3.6% and private house approvals down -4.2%. The US delivered the week's largest surprise. Payrolls rose 162,000 against 55,000 expected, with the prior two months revised up a combined 55,000 and the three-month average lifting to 71,000. Unemployment held at 4.1% and underemployment fell to 7.7%. The internals were softer: ADP recorded 38,000, job openings fell to 7.27 million, the quits rate slipped to 1.9%, and services employment contracted at 47.8. The most accurate description is a low-hiring, low-firing labour market that produced one strong month. The inflation-relevant American data was arguably more important. ISM services prices paid rose to 72.6 against 70.0 expected and manufacturing prices paid held at 71.1, both at levels historically consistent with accelerating rather than decelerating services inflation. Europe requires us to qualify a view. Last week we described it as the exception, converging on target. Headline inflation has jumped to +3.3% from +2.9% and producer prices to +5.8%, though core did ease to +2.4% and retail sales fell -0.6%. China stabilised rather than recovered, with official surveys still in contraction at 49.5 composite while private surveys expanded at 52.1. Sentiment stayed calm throughout, with the VIX up just 0.10 points to 14.53. Whatever markets concluded this week, they did not conclude it anxiously. Equity Markets It was a divided week, and the split has a straightforward explanation: the good growth news was American. The S&P 500 rose +0.09% and the NASDAQ +0.40%, while the ASX 200 lost -0.95%, the STOXX -0.81%, the Nikkei -2.09% and the CSI 300 -1.33%. The Hang Seng was a modest exception at +0.26% higher. A US payrolls print beating by more than 100,000 jobs supports US earnings directly, offsetting the discount rate effect of higher yields. Elsewhere, investors received the higher-for-longer message without the growth compensation. Australia is the clearest illustration of higher rates doing what higher rates do. A GDP beat and an accelerating inflation gauge weakened the case for RBA easing, ten-year yields rose 8 bps, and the index fell. What makes the local market particularly exposed is the absence of any valuation cushion. The ASX 200 trades on 18.8x forward earnings for an earnings yield of 5.33%, against a ten-year government bond at 5.17%. The equity risk premium is therefore approximately 16 bps, a fourth consecutive week of compression from roughly 33 to 27 to 18 and now 16. That is the compensation an investor currently receives for accepting the volatility, drawdown risk and earnings uncertainty of the Australian share market in place of a government bond, and we would characterise it as thin by any historical standard. The twelve-month record reinforces the point: a 2.0% price return and a 3.41% dividend yield against a 4.35% cash rate that carried no volatility at all. Franking improves that comparison materially for domestic investors, but it does not change the observation. Valuation dispersion across global markets is now unusually wide — the NASDAQ on 30.0x forward earnings, the S&P 500 on 21.5x, the Nikkei on 21.0x, the ASX 200 on 18.8x, the STOXX on 15.7x, the CSI 300 on 14.7x and the Hang Seng on 11.6x. The NASDAQ at thirty times has the most to lose from a sustained rise in long yields, and the ten-year Treasury rose 6 bps this week to within 2 bps of its one-year high. It rose anyway, on the strength of the employment data. We flag that tension rather than pretend to resolve it, because it will resolve one way or the other. Europe at 15.7x, with a 6.36% earnings yield, remains the better-valued developed market, though this week's inflation and retail sales figures weakened the supporting macroeconomic case. The Hang Seng at 11.6x is the cheapest major market, and cheap for identifiable reasons given China's official surveys remain in contraction. Both are valuation observations rather than recommendations. Fixed Income & Credit Australian government bonds and the RBA – yields rose across the entire curve: three-year bonds up 9 bps to 4.75%, five-year up 9 bps to 4.79% and ten-year up 8 bps to 5.17%, with swaps moving almost identically. The character of the move is the important part. The prior week's sell-off was a front-end bear flattening that repriced the next few RBA meetings. Last week the whole curve moved together, and the three-to-ten-year curve narrowed only 2 bps to 43. A near-parallel shift says the market is repricing the level of rates across the entire horizon, and the expected path of inflation with it, rather than the timing of the next decision. That is more consequential for holders of fixed rate bonds, because a parallel shift hits long duration hardest in price terms. The market's view of what comes next from the RBA is visible in prices: three-month BBSW at 4.59% sits 24 bps above cash, up from 20 bps and 1 bp below its one-year high, while three-year swap at 4.75% is 40 bps above. Neither is consistent with a market expecting easing. We will not forecast the decision, but we observe that a portfolio positioned for near-term easing is now positioned against consistent market pricing, and that this week's data moved decisively against it. US Treasuries – the two-year rose 2 bps to 4.37% while the ten-year rose 6 bps to 4.78%, steepening the two-to-ten-year curve to 42 bps from roughly 37 bps. The two-year barely moved on an employment report beating by more than 100,000 jobs because it had already completed its repricing — at 4.37% it sits within 3 bps of its one-year high with cuts largely priced out. The long end absorbed the message instead, with stronger growth, services prices paid at 72.6 and crude up 21% over the month arguing for higher inflation compensation and term premium. A bear steepening driven by the long end is a materially different signal from the prior week's bear flattening. Flattening said tighter policy now and weaker growth later. Steepening says growth is holding and inflation risk is being repriced further out. We place more weight on this week's move because it is corroborated by the ISM price series and the oil price, rather than resting on curve shape alone. Investment grade credit and Australian bank paper - spreads widened modestly for a fourth consecutive week, though the moves remain small: floating rate credit 1 bp wider to 60.5 bps, fixed rate 1.4 bps to 78.9 bps, major bank five-year senior -1 bp to 67 bps, and Tier 2 unchanged at 127 bps. Context is important. The floating index is still 1.6 bps inside its one-year average and only 4.5 bps above its tight; senior at 67 bps is 6.5 bs inside its average. These are tight spreads drifting gently off their tights, not a credit market showing stress. The subordination premium now stands at 60 bps against a one-year average of approximately 64 bps. We noted in late August that the relative value case for reaching down the capital structure had largely been captured, and that view is unchanged: senior has continued to cheapen while Tier 2 has not moved. At approximately 6.32% all-in, Tier 2 remains attractive in absolute terms against a 4.35% cash rate — the point is narrower, that the case now rests on absolute yield rather than relative value. One technical observation. Fixed rate credit widened more than floating this week and now trades 18 bps points wide of it. In a week when the entire curve shifted higher, spread product carrying duration cheapened more than spread product without it. That is a rates effect rather than a credit quality effect. Nothing in this week's data points to deterioration in the capacity of Australian banks or investment grade corporates to service their debts. What this means for income-focused investors? The arithmetic continues to move in favour of front-end and floating rate exposure. BBSW at 4.59% is close to a one-year high, and it is the reference rate off which floating rate coupons reset. Investment grade floating rate credit is currently generating approximately 5.20% all-in at an index credit quality of around AA-. The comparison worth making is against equities. The ASX 200 earnings yield is 5.33%. An investment grade floating rate portfolio yields approximately 5.20% with a fraction of the volatility, no earnings uncertainty and a substantially higher position in the capital structure. 13 bps is not adequate compensation for accepting equity risk. Fixed rate investors had a poor week. An 8 bps rise in ten-year yields costs roughly 0.6% in price on a ten-year bond, and that cost was incurred across the curve rather than at a single point. This is the mechanical cost of holding duration while yields rise, and it is why we have consistently preferred floating rate exposure through this phase. Outlook The central case. Growth is holding up better than markets feared a month ago in both Australia and the US, inflation is proving more persistent than assumed, and policy rates stay at or above current levels for longer in both economies. We attach the highest probability to this scenario, with the caveat that the phrase holding up is doing considerable work in a world where crude has risen 21% in a month. Key risks. The clearest adverse scenario is energy-driven: crude holds around current levels, headline inflation re-accelerates across developed markets, expectations follow, and central banks tighten into economies growing only modestly. That combination is unfavourable for equities and fixed rate bonds simultaneously, which is the correlation problem that made 2022 so uncomfortable for balanced portfolios. Second, an Australian inflation surprise — the Melbourne Institute gauge at 4.8%, household spending at 7.0%, credit growth at 8.4% and a GDP beat all point one way, and a September quarter CPI confirming it shifts the discussion from when the RBA cuts to whether it hikes. Third, and in the opposite direction, the US labour market internals: if ADP, job openings and the quits rate prove the more accurate signal, growth expectations reset lower and the long-end sell-off reverses. That is the scenario in which duration pays, and the principal argument against abandoning fixed rate exposure entirely. Key opportunities. Front-end and floating rate income remains the clearest, with investment grade floating credit at approximately 5.20% for AA- quality and Tier 2 at approximately 6.32% all-in — yields unavailable for most of the past decade, delivered without duration risk. Second, government bonds at 5.17% in Australia and 4.78% in the US now offer entry levels at which duration functions as a genuine hedge rather than a drag. Third, equity valuation dispersion is wide, and non-US developed markets are priced considerably more forgivingly. Central banks. We will not forecast decisions, but the direction of travel in this week's data made RBA easing less likely rather than more. The Federal Reserve confronts strong payrolls alongside services prices paid at 72.6, which argues against near-term easing. The ECB faces the least comfortable position, with headline inflation at +3.3%, core at +2.4% and retail sales contracting — the beginning of a genuine growth-versus-inflation trade-off. Inflation and growth. Inflation risk has shifted higher again and the source has changed: Australian services inflation and sticky US core PCE both remain, but energy has been added on top, and energy affects every economy simultaneously rather than sequentially. Europe's headline reversal is the first visible evidence. Growth is better than expected and more evenly distributed than we described last week, though we would characterise it as adequate rather than robust — and adequate growth alongside firming inflation favours income over capital growth. What would change the narrative? A sustained retreat in crude below roughly US$85 would remove much of the newly added inflation risk and improve the outlook for bonds and equities together. An Australian September quarter CPI confirming core above +3.5% would shift the conversation from no cuts to how many hikes. And a genuine deterioration in US employment would reverse the long-end sell-off quickly and reward the duration that cost investors’ money this week.

“Originality is the fine art of remembering what you hear but forgetting where you heard it" - Laurence J. Peter Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 14th August): Stocks (ASX 200 ↑ 0.37%, S&P 500 ↑ 0.49%, NASDAQ ↑ 0.85%) Bond Yields (ACGB3Y 4.66%, ↑ 9 bps / ACGB10Y 5.10%, ↑ 4 bps) Bond Curves (A$ 3s10s +44 bps, ↓ 5 bps) Credit Spreads (Major Bank 5Y Senior +68 bps, ↑ 4 bps / Tier 2 +127 bps, ↔) Oil (Brent US$89.31/bbl, ↓ 5.38%) Gold (US$4,455/oz, ↓ 3.21%) Executive Summary Australian inflation refused to fall as expected. July Headline CPI came in at +3.5% YoY against a +3.3% YoY forecast, and the trimmed mean — the RBA’s preferred core measure — held stubbornly at +3.6% YoY, above expectations and above the target band. Household spending accelerated to +7.0% annually against a +5.7% forecast. It doesn’t look like prices are going south anytime soon. The front end of the bond market repriced immediately. Three-month BBSW rose 6 bps to a one-year high, three-year government bond yields rose 9 bps, and three-year swap rose 12 bps. Australian and US curves both flattened sharply as markets priced out easing and began pricing tightening risk. Equities barely reacted, rising modestly with volatility falling. For income investors, the practical consequence is favourable: floating rate coupons now reset higher, with investment grade floating rate credit yielding approximately 5.15%, for a weighted average credit rating of AA–. Market Overview The dominant narrative: The disinflation trade has stalled For much of this year the working assumption in markets has been that inflation was on a slow but reliable path back to target, and that policy rates would eventually follow it down. This week supplied contrary evidence in both Australia and the United States, and the front end of both bond markets responded decisively. Headline inflation did fall, from +3.8% YoY to +3.5% YoY. But it fell by less than expected, and the more important number is the trimmed mean at +3.6% YoY — unchanged from the prior month, above the +3.5% YoY forecast, and comfortably above the 2–3% target band. The distinction matters, and it is worth explaining plainly. Headline inflation includes volatile items such as fuel and fresh food, which can swing sharply for reasons unrelated to the underlying pressure in an economy. The trimmed mean strips out the largest movers in both directions to reveal the persistent component. Headline inflation improving while the trimmed mean stands still tells you that the improvement is coming from volatile items, not from the underlying inflation problem. The monthly trimmed mean actually accelerated, to +0.5% MoM from +0.3% MoM. Household spending explains a great deal of why. Spending rose +7.0% YoY against a +5.7% YoY forecast, with the monthly figure at +1.1% MoM against +0.3% MoM expected. Australian consumers are not behaving like people constrained by a 4.35% cash rate. Demand of that strength gives businesses room to pass on costs, which is precisely the mechanism that keeps core inflation elevated. The other side of the Australian ledger: We would be presenting an unbalanced picture if we stopped there, because the business side of the economy delivered genuinely poor numbers in the same week. Private capital expenditure fell 3.6% in the June quarter against an expected +0.8% rise, reversing a +6.9% gain. Construction work done fell 2.1% against an expected +0.4% increase. These are meaningful misses, and they follow last week’s employment report showing a 16K fall in jobs and unemployment rising to 4.5% (albeit still well below post-GFC averages). Australia now presents an uncomfortable combination: sticky core inflation and a strong consumer on one side, contracting business investment and a softening labour market on the other. At least, that is what the latest data suggests — with the caveat that capex is a volatile series. Nonetheless, this is closer to a stagflationary configuration than anything we have described in recent months, and it is the least helpful backdrop for a central bank. Policy that addresses the inflation problem worsens the investment problem, and vice versa. The RBA’s August Statement had already flagged that “historically weak productivity growth continues to constrain potential growth.” Capital expenditure contracting 3.6% in a quarter does not improve that outlook. Equity Markets A quiet, mildly positive week across developed markets, with the NASDAQ leading at +0.85%. The most striking feature of the week was how little equity markets cared about the data. The VIX fell 0.70 points to 14.43, and every major developed market rose modestly. A meaningful hawkish repricing at the front end of two major bond markets produced almost no equity volatility. The more interesting question is why developed equities rose at all. Bond markets spent the week concluding that rates will stay higher for longer. Higher rates ordinarily compress equity valuations. Yet the NASDAQ, the most valuation-sensitive major index at 28.9x forward earnings, led the market higher. We can offer two partial explanations. The repricing in bond markets was concentrated at the front end — the US ten-year actually fell ~2 bps and the Australian ten-year rose only 4 bps — and long-dated equity valuations are more sensitive to long yields than short ones. Alternatively, equity investors may be reading the strong household spending and consumption data as supportive of earnings, offsetting the discount rate effect. We flag both as hypotheses. The Australian equity risk premium has now compressed for a third consecutive week — from approximately 33 bps to 27 bps, to 18 bps. Australian equities rose modestly while bond yields rose more, and the gap narrowed again. Eighteen basis points is the compensation an investor currently receives for accepting the volatility, drawdown risk and earnings uncertainty of the Australian share market instead of holding a government bond. We would characterise that as thin by any historical standard. The twelve-month picture reinforces it. The ASX 200 has returned 1.3% in price terms over the past year while cash paid 4.35%. The index yields 3.27% before franking, and on a grossed-up total return basis the twelve-month comparison improves materially, to approximately +5.1%. On price alone, however, an investor who accepted full equity market risk for twelve months was rewarded with a little over one per cent. Europe remains the best-positioned major market on valuation grounds at 15.9x forward earnings, a 6.30% earnings yield, and a third consecutive week of improving confidence data alongside inflation expectations converging on target. Fixed Income & Credit Three-month BBSW rose 6 bps to 4.55%, which is its highest level in a year. Its premium over the cash rate widened to 20 bps from 14 bps. This is the single most informative number in this week’s dataset, and it deserves explanation. BBSW is the rate at which Australian banks lend to each other over three months. It sits above the cash rate by an amount that reflects both bank funding conditions and, importantly, market expectations for where the cash rate is heading over that horizon. A 6 bps jump to a one-year high, in a week when the RBA did not meet, is the market attaching greater weight to the possibility that the cash rate goes up rather than down. The government bond curve bear-flattened, meaning short yields rose more than long ones. Three-year yields rose 9 bps against the ten-year’s 4 bps, narrowing the three-to-ten year curve to 44 bps from 49 bps. The interpretation is straightforward. Yields at the short end are driven primarily by expected policy. Yields at the long end are driven more by expected long-run inflation and growth. A curve that flattens because the short end sold off is a market saying: policy will be tighter than we thought over the next few years, but this does not change our view of the long-run economy. Given a trimmed mean stuck at +3.6% and household spending at +7.0%, that is a coherent conclusion. In US Treasuries, the two-year rose 11 bps to 4.34% — essentially its one-year high of 4.35% — while the ten-year fell ~2 bps to 4.72%. The two-to-ten year curve collapsed to 37 bps from 50 bps. This is a sharper version of the Australian move, and the divergence between the two ends is instructive. The front end responded to sticky core PCE and an upward revision to Q2 core inflation. The long end responded to collapsing survey data — Chicago PMI at 47.1, Philadelphia non-manufacturing at -10.6 — which speaks to weaker future growth. A curve flattening this aggressively reflects a market pricing tighter near-term policy and weaker medium-term growth simultaneously. Historically, that combination has been associated with slowing economies, though we would caution that curve signals have been unreliable in recent cycles and we place limited weight on it. Credit spreads widened modestly again, with major bank senior paper the most affected at 4 bps. A three-week pattern has now established itself that requires us to revise a view. Major bank senior spreads have moved 63 → 65 → 68 bps over three weeks, widening 5 bps in total. Tier 2 has been unchanged at 127 bps for two of those weeks. The consequence is that the subordination premium — the additional spread earned for holding subordinated bank paper rather than senior — has compressed from 64 bps three weeks ago to 59 bps, now below its one-year average of approximately 64 bps. In our commentary of 14 August we noted that Tier 2 offered better relative value than senior, on the basis that senior sat exactly at its one-year tight with no cushion while Tier 2 sat 16 bps above its own tight. That relative value gap has now substantially closed, and we are updating the view. Senior has cheapened by 5 bps and now sits 5 bps above its tight. Tier 2 has not moved. Investors are being paid less than the one-year average for accepting subordination risk. We would not characterise Tier 2 as poor value — at approximately 6.24% all-in it remains attractive in absolute terms. But the relative case for reaching down the capital structure has weakened somewhat over three weeks, and investors who acted on the earlier observation should recognise that the opportunity has largely been captured. One further observation. Credit spreads widened this week while equities rose and the VIX fell. That combination is unusual — credit and equities normally move together in risk terms. When credit widens against a rising equity market, the cause is more often technical than fundamental: new issuance requiring concessions, or spread product cheapening against a sharply repricing rates curve. And that is exactly what happened: credit supply was on the heavy side, which nudged senior spreads wider. Nothing in this week’s data suggests any change in the ability of Australian banks or investment grade corporates to service their debts. Outlook The central case. Inflation is proving more persistent than markets assumed six months ago, policy rates stay higher for longer in both Australia and the US, and growth slows gradually without breaking. Australia is the harder case: inflation persistence sits alongside contracting business investment and a softening labour market, which limits the RBA’s room to move in either direction. Central banks. The RBA now faces exactly the upside inflation risk its August Statement said would prompt further tightening — a trimmed mean holding at +3.6% YoY against an expected fall, household spending at +7.0% YoY, consumer inflation expectations at 4.9%. Against that: employment down 16K, unemployment at 4.5%, capex down 3.6% and construction down 2.1%. We will not forecast the decision, but the market has moved decisively — BBSW at a one-year high, three-year swap up 12 bps — and anyone positioned for near-term cuts is now positioned against a clear signal. Q2 GDP on 2 September is the next test, with consensus at +0.3% QoQ and annual growth slowing to +1.8% YoY from +2.5% YoY; given the capex and construction figures, we see genuine downside risk. A weak print alongside +3.6% YoY core inflation would sharpen the dilemma considerably. The Fed faces sticky core PCE at 3.3% and an upward Q2 revision against internally contradictory survey data — with the two-year Treasury at a one-year high, the market appears to have concluded inflation persistence outweighs the survey weakness. Inflation. Risk has shifted upward in both Australia and the US. Australia’s trimmed mean has not fallen in two months and the monthly rate accelerated, with household spending at +7.0% YoY giving firms pricing power; oil retracing 5.4% helps the headline but not the core. US core PCE has held at +3.3% YoY for three months. Europe remains the exception, with expectations converging on target. Growth. Deteriorating at the margin, regionally uneven. Australia’s business sector is contracting while its consumer spends strongly — an unusual and probably unsustainable divergence. US hard data points to gradual rather than sharp slowing despite conflicting surveys. China continues to weaken; Europe continues to improve modestly.

“Prediction is very difficult, especially if it's about the future" - Niels Bohr Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 14th August): Stocks (ASX 200 ↓0.62%, S&P 500 ↓1.43%, NASDAQ ↓2.03%) Bond Yields (ACGB3Y 4.57%, ↑ 5 bps / ACGB10Y 5.06%, ↑ 5 bps) Bond Curves (A$ 3s10s +49 bps, unchanged) Credit Spreads (Major Bank 5Y Senior +65 bps, ↑ 2 bps / Tier 2 +127 bps, ↑ 4 bps) Oil (Brent US$94.39/bbl, ↑6.63%) Gold (US$4,603/oz, ↑5.18%) Executive Summary Last week's growth scare unwound almost entirely. The US S&P Global composite PMI jumped to 56.0 against a 54.0 forecast, with services at 56.8, contradicting the weak retail sales that had unsettled markets seven days earlier. Europe's PMIs also beat. The relief came at a price. Stronger data pushed US two-year yields up 6.7 bps and the ten-year to 4.73% — effectively its highest level in a year — and equities paid for it. The NASDAQ fell ↓2.1%, the S&P 500 ↓1.4%. Australia received the opposite news. Employment fell ↓16K against a forecast ↑12K, unemployment rose to 4.5% from 4.4%, yet consumer inflation expectations climbed to 4.9%. Australian bonds still sold off. For investors, the message is unchanged but sharper: with the ASX flat over twelve months and investment grade credit near 5.1%, income is being rewarded and equity risk is not. Do we sound like a broken record? Market Overview The dominant narrative: good news is bad news — and Australia got the bad news without the good Two weeks ago the concern was the US consumer had stalled. Last week that concern was substantially retired, and markets discovered they did not enjoy the alternative. The US S&P Global composite PMI printed 56.0 for August against a 54.0 consensus, up from 54.5. Services drove it at 56.8 versus 54.0 expected. That is not a marginal beat; it is a survey pointing to an economy expanding at a healthy clip. Manufacturing was the exception, easing to 53.2 from 53.9, but the composite tells the story. The Conference Board's Leading Index also turned positive at +0.2% after a negative prior reading. Supporting evidence arrived from the US labour market. Initial jobless claims came in at 206K against a 210K forecast — better than expected. But the detail is less comfortable than the headline: the four-week moving average rose to 204K from around 200K, and continuing claims increased to 1.8m. The weekly number improved; the trend did not. We would describe the US labour market as gradually loosening rather than deteriorating. Why this mattered for markets: when growth data is strong and a central bank is already reluctant to ease, strong data removes the prospect of rate relief. Bond yields rise. And when bond yields rise, the discount rate applied to future company earnings rises with them, which compresses equity valuations — most severely for companies whose earnings sit furthest in the future. That is precisely the pattern we saw, with the NASDAQ falling ↓2.1% against the S&P 500's ↓1.4%. On the inflation front, Europe presented the cleanest picture of the three major regions. Eurozone CPI was confirmed at +2.9% YoY with core at +2.5% YoY — above target but stable. More importantly, forward-looking measures improved: ECB one-year consumer inflation expectations eased to +2.9% YoY from +3.0% YoY, and three-year expectations fell to +2.7% YoY from +2.8% YoY, close to target. Negotiated wages cooled to +2.44% YoY and labour costs to +3.1% YoY. Europe is achieving something the US and Australia are not — disinflation in expectations, not just in outturns. Australia moved in the wrong direction. Consumer inflation expectations rose to +4.9%YoY in August from +4.7% YoY. This matters more than it might appear. The RBA's August Statement was explicit that short-term inflation expectations, while easing, remained higher than earlier in the year. They have now stopped easing and started rising. Central banks - the RBA held at 4.35% on 11 August, and its Statement carried a materially more hawkish tone than a simple hold implies. The Board noted three cash rate increases this year, described policy as only "somewhat restrictive," projected inflation would not return to around the midpoint of the target band until late 2027, and stated explicitly that it would raise rates further if upside risks materialise. The decision was unanimous. The employment report was a genuine miss — a fall of ↓16K where the market expected a gain of ↑12K, with unemployment rising to 4.5% from 4.4% and participation slipping. The RBA's own Statement had said labour market conditions "have eased by a little more than expected" and that leading indicators pointed to "only limited easing in the near term." This print eased considerably more than that framing anticipated. One important nuance that just a cursory look will miss: the composition was better than the headline. Full-time employment rose ↑16K while part-time employment fell ↓32K. Full-time roles carry higher hours and income, so a shift toward full-time within a falling total is a genuine mitigant. This is a soft report, not a collapse, and we would caution against over-reading a single month of a notoriously volatile series. Wages were benign — the Wage Price Index rose ↑0.8% QoQ and ↑3.2% YoY, both exactly in line. Wage-driven inflation is not the problem. Rising consumer inflation expectations, sitting at +4.9% YoY while wages run at +3.2% YoY, are a different and more awkward issue. Investor sentiment softened but did not break. The VIX rose 0.88 points to 15.13 — higher, but still low by any historical standard and below where it sat a quarter and a year ago. European sentiment was firm, with the ZEW expectations survey jumping to 31.4 from 23.4. The most telling sentiment indicator was in credit, where spreads widened only fractionally in a week when equities fell and bond yields hit one-year highs. We discuss this below, because we think it is the single most useful observation in this week's data. Equity Markets The week was an almost exact reversal of the prior one. The Nikkei, which gained ↑4.7% the prior week, fell ↓3.9% last week. The Hang Seng, which fell ↓2.1%, rose ↑3.6%. When two markets swing that sharply in opposite directions across consecutive weeks without a corresponding shift in fundamentals, the most likely explanation is positioning and profit-taking rather than a change in outlook. We flag that as inference — we have no flow or positioning data — but the symmetry is difficult to attribute to anything else. The US decline has a clearer cause. Strong PMIs pushed yields higher, and higher yields compress equity valuations. The NASDAQ's underperformance is consistent with this: at 28.8x forward earnings, more of its value sits in distant cash flows, which are more sensitive to the discount rate. This is textbook duration risk expressing itself in equities rather than bonds. Australia held up comparatively well, falling ↓0.6% against the S&P 500's ↓1.4%. Given the employment miss, that is a reasonable outcome, and the ASX's lower weighting to long-duration technology likely helped in a week defined by rising yields. The valuation observation that matters most. The ASX 200 has returned +0.4% over the past twelve months. Cash paid 4.35%. An investor who took full equity market risk for a year captured essentially nothing in price terms, while an investor who took none earned the cash rate. Dividends and franking improve the equity picture materially — but as a statement about where risk was rewarded, the comparison is stark. The Australian equity risk premium has compressed further, from roughly 33 bps a week ago to 27 bps last week. In the US it remains negative. Investors buying the S&P 500 today accept a forward- earnings yield fractionally below what a risk-free Treasury pays. Two caveats we owe clients. Franking credits meaningfully improve the after-tax return on Australian equity income, so the raw comparison understates the domestic equity case. And a compressed risk premium is a statement about prospective long-run returns, not a timing signal — thin premia can persist for years. But the direction is unambiguous, and it has moved the wrong way again this week. Europe remains the valuation outlier among developed markets at 15.9x forward earnings, a 6.3% earnings yield, and — uniquely — improving PMIs alongside inflation expectations falling toward target. Hong Kong at 11.8x is cheaper still, but this week demonstrated that its price action is presently disconnected from its fundamentals Fixed Income & Credit The most instructive fact from last week is that Australian bond yields rose after a weaker than expected employment report. Employment fell ↓16K, unemployment rose to 4.5%, and the market's response was to sell bonds across the curve. That is not irrational and understanding why matters. Bond yields reflect both the expected path of policy and expected inflation. A weak jobs report argues for a lower policy path. But three things pushed the other way: consumer inflation expectations rose to 4.9%, the RBA has an explicit and recently restated hiking bias, and US yields rose sharply on strong American data. Australian bonds do not price in isolation, and last week the global and inflation signals overwhelmed the domestic growth signal. The message for investors is that the Australian bond market is currently more worried about inflation persistence than about a slowing economy. Until that changes, weak activity data may not deliver the bond rally that intuition suggests. Consider the environment credit faced last week: global equities fell across almost every major market, volatility rose, US ten-year yields reached a one-year high, Australian employment contracted, and Chinese activity deteriorated. Australian investment grade credit spreads widened by less than one basis point, and Tier 2 hardly moved at all. That is a meaningful demonstration of the asset class's defensive characteristics. Credit spreads compensate investors for default risk, and nothing this week changed the probability that Australian major banks and investment grade corporates will repay their debts. Equity prices react to earnings expectations and discount rates; investment grade credit reacts primarily to solvency. When the news is about growth rates and valuations rather than balance sheets, credit holds. Some detail worth noting. Major bank senior paper widened 2 bps from 63 bps to 65 bps, moving off the one-year tight it reached last week because of technicals (supply) rather than fundamentals. We regard this as healthy rather than concerning — a market at its absolute tights offers no compensation for anything going wrong, and a small step back builds a modest cushion. Tier 2 held steady at 127 bps, still 16 bps above its one-year tight of 111 bps. The subordination premium — the extra spread for holding subordinated over senior bank paper — narrowed to 62 bps from 64 bps, now marginally below its one-year average of around 64 bps. Tier 2 remains the better positioned of the two within its own trading range, though that advantage has narrowed as senior widened. Outlook The central case - the most probable configuration from here is one of resilient but decelerating global growth, inflation that is improving unevenly by region, and central banks — particularly the RBA — that are more reluctant to ease than markets would prefer. The RBA is the central question for local investors, and last week sharpened it considerably. The August Statement was hawkish: three hikes this year, policy described as only "somewhat restrictive," inflation not expected back at the midpoint until late 2027, and an explicit readiness to hike again. A week later, employment fell and unemployment rose to 4.5%. The Board now faces genuinely conflicting evidence. Wages at +3.2% YoY are benign. Employment is contracting. But consumer inflation expectations rose to +4.9% YoY, and the RBA's own framework treats embedded expectations as the principal danger. We would not attempt to predict the outcome. We would say that the probability of near-term easing appears lower than a weak jobs print alone would suggest, and the probability of further tightening is not zero. Two events this week will materially inform this. The RBA Minutes on 25 August will reveal how the Board weighed these risks. Far more importantly, July CPI is released on 26 August, with consensus expecting headline inflation to fall to +3.3% YoY from +3.8% YoY and the trimmed mean to ease to +3.5% YoY from +3.6% YoY, both still well above the 2–3% target band.

Residential mortgage-backed securities (RMBS) are one of the fastest-growing areas of Australia’s fixed income market, yet the asset class remains relatively unfamiliar to many investors. In this webinar, Scott Rundell, Chief Investment Officer at Mutual Limited, joins John Clothier, General Manager of Distribution at Copia Investment Partners, to explore how Australian RMBS works, what is driving the growth of the market, how it differs from the US experience, and why institutional investors are increasingly looking to the asset class for income, diversification and capital preservation. Watch the full webinar below (38:05 minutes). Transcript John Clothier (00:01.174) Good morning everybody. My name's John Clothier. I'm the general manager of distribution at Copia Investment Partners. We have the pleasure of partnering with Mutual Limited, a cash through to fixed income fund manager based out of Melbourne. Today I have with me Scott Rundell, who is the CIO of Mutual, who has a a pretty in interesting topic for us to run through. Pretty interesting markets on the equity side, volatility in the markets. I think there are a lot of people having a look into this space for some income solutions without having to dial up that volatility. So, I think it'd be a great opportunity to hand over to yourself and take us through all the nuances of this space, if that's all right. Scott Rundell (00:45.39) Thanks, John. Good morning everyone. I am Scott Rundell, Chief Investment Officer of Mutual Limited. We’re a Melbourne-based funds manager. We specialise in fixed income, primarily floating rate product, with just under five billion under management spread across retail and wholesale institutional mandates. So .the topic today is the fastest growing asset class you've never heard of, mainly RMBS. Now most people have probably heard of RMBS or may be familiar with it from the GFC. What happened during the GFC? Why it matters is it is an excellent alternative income generating asset that a lot of people are probably not familiar with. Just on this slide, on the left-hand side, there's a very generic breakup of what a client's portfolio might look like: cash, equities, property, and traditional bonds. In the Australian context, we are as a country are heavily invested in equities and property for that matter, while traditional bonds, which would incorporate thesort of product we're talking about today is probably less appreciated for various reasons which I won't go into. But to give you some context, within the Australian superannuation asset pool, roughly 19% is held in traditional bonds or fixed income. This compares to about 35% across the OECD average. So, we are well underrepresented and somewhat overrepresented in equities for historical reasons. Again I won't go into it, but I'd say your typical fund manager would say they have zero in RMBS. So. Hopefully we’re looking to change that. So, what are we going to touch on today? What securitization is, which is the sort of the technology backing RMBS and ABS, and then why the market's grown so rapidly over the last few years. Even though it has grown rapidly recently, the market has in fact been around for almost 30 years. Why institutional investors such as us use it, why it differs from US products, which some people may be more familiar with given the GFC and some of the stories coming out of the US. And where RMBS fits into your portfolio potentially. The size of the opportunity. Over the past decade we've seen strong growth in RMBS and ABS, , especially in the last five years. And this chart on the righthand side shows you RMBS issuance going back to 2004. YWe can see the impact of the GFC in 2008, it dropped quite drastically and then it's recovered consistently. That final column is iyear to date. If you analyze the data, we're in for another strong year. If we add ABS securities, which uses the same technology, we're looking at about $80 billion a year on issuance over the last two or three years. And the outstanding market is roughly $250 billion. To give you some context, the overall credit market, so that's bonds issued by companies and banks generally in Australia, is roughly around. two hundred and fifty billion in the floating rate space and slightly less in the fixed rate space. Arrocingly, it’s a meaningful part of the domestic investment landscape, especially the area that we're focused on. Why is it growing so quickly? What are the drivers? There's three key areas in this regard. On the left, you'll see banks. Banks are the main funding mechanism for credit in the Australian market. A lot of people, the banks control, say 75-80% of the ABS, sorry, the mortgage market, and a similar percentage of the deposit market. But increasingly, because of regulatory changes around the banks post GFC and the differentiation between what's called a prime mortgage, what's called a non conforming mortgage, has seen the banks step away from a particular type of lending, specifically lending to people who are classified as non conforming. It's not a stigma, it's just a sort of regulatory classification. But nevertheless, they are big users of RMBS as a funding tool, but less so in than in the past. The big users of funding this space are the nonbank originators . And they’re names you might be familiar with, Red Zed, if you follow Rugby League. Other major non-bank originators include the likes of Liberty Home Loans, Red Z, Resimac, and Pepper. These are companies that have been around for 20 plus years. And their specialty is lend to mum and dad investors who perhaps aren’t consider prime borrowers for various reasons. And they fund themselves using RMBS securities. Why ? Well, it's a deep, cheap, and a very accessible market for them, but they also don't have access to deposit takers, deposits, because they're not a regulated institution, although they do adhere to regulatory requirements and the like. And then lastly, the right-hand side is demand from investors such as ourselves has been growing very, very strongly. Interest rates have been rising. RMBS and ABS securities are floating rate securities. So as interest rates go up, the coupons that you generate through these securities increase as well. They're what you call inflation immune, and your income continues to rise as interest rates go up. Who uses it, as I've touched on, or from an investor's perspective, Australian superannuation funds are big investors in this space, particularly the triple A part of the capital stack, and I'll touch on what that means in a moment. Insurance companies, banks, sovereign wealth funds, and then asset managers such as ourselves, we like this product because it generates stable income. As I mentioned earlier, it's inflation immune and historically the capital price has been very, very stable, such that your capital downside in a risk off events such as COVID is relatively modest. So the GFC itself is relatively modest compared to say equities or other securities that are more exposed. How do they work? What is securitisation? Securitization is basically a bundling up of assets. In a simple example of the left, say 1,000 mortgages. If we placed all those mortgages into a trust, a specialized vehicle, its only job in life is to own those loans or those mortgages and then issue securities to fund the purchase of those mortgages. We investors buy the securities and they're backed by the loans. As borrowers make repayments on their loans being principal and interest, the investors receive income through time. And on the righthand side, I've talked about sort of the broad dynamics. There's RMBS, so home loans, there's owner occupied and investment loans. And obviously the latter will be growing slower because of the budgetary changes or proposed budgetary changes around negative gearing and capital gains tax. As I mentioned, the income source is your mortgage payments. And in Australia, mortgages are very, very robust relative to offshore markets. They're full recourse. We have a first charge over the underlying property and for tax reasons you're incentivised to pay your mortgage off as quickly as possible. The underlying debt is ABS. So this is asset back for auto loan. Banks sort of don't do as much auto lending as they used to again for capital charges that have increased post the GFC in the regulatory environment. Equipment finance. So an example is there's an ABS issue out there that finances solar panels. there are specialist RMBS or ABS deals, I should say, that do medical equipment. So dentist chairs, operating table, all those sort of things need to be financed. and those assets are So the loans that buy those assets are bundled up into these securities and allows us to buy them and get decent risk adjusted returns. One of the big misconceptions about RMBS is that it's risky. I've put a picture of the movie The Big Short here, which is a fantastic movie. very entertaining even if you're not into finance. Mywife who is not financially inclined watched it and actually found it very enjoyable and it is it is a fun watch. But it goes around what happened in the US market and why we had the GFC, the catalyst and the there's Michael Bury who is a renowned person who predicted the decline of the US housing market and it tells the story of how it collapsed. Now people watch this and think RMBS is a dirty word. The difference between what happened in the US in Australia is quite stark and is worth focusing on for a few moments. But from what a lot of people remember in the RMBS is the GFC, the subprime market and Lehman Brothers collapse, the housing collapse in the US, and that sort of thing. As I said, great movie, but does not reflect what happens in Australia or has happened historically in Australia. as I said, RMBS has a branding problem. and hopefully we can start to turn that around. Whyare mortgages in Australia so much better than or stronger historically than the US. There's just a couple of examples here, just some metrics that I've put up. If you look at the size of the housing market in Australia relative to outstanding mortgages, so top left chart there. These stats are a little older, bit out of date, but the relativity is about right. It says that the value of housing in Australia is about 10 trillion, it's close to 11 trillion at the moment. And the loans back against our 2.2 is close to about 2.5, 2.6 trillion. In an aggregate sense, the loans and value ratio is around 25-26%. lot lower than say the US example, where it's roughly don't do the math. It's actually the same LVR, but where it differs is the actual individual loan level. So it sort of implies a lot more people own their houses in America. On the right hand side, we see how important housing is to our GDP. It is a major part of the market. We are incentivized in Australia to own our own property from a tax perspective, and I'll get on to that in moment. Then the bottom left is what percentage or the arrears rate, I should say. So this is the percentage of mortgages that are behind scheduling their payments. If you look at the Australian example at the moment. Arrears data per this slide is 3.65%. So that's 3.65% of non-conforming mortgages are behind in their payments by more than 30 days. The long run average there is written as 5.95%. This uses a varied degree of data. Other data I have sort of indicates the long-on-average is about eight percent, but the current level is about three and a half percent compared to say eight percent long on average, and at its worstwhich was in 2002, the arrears rate was 23% in the Australian mortgage market, which is obviously very, very high. in the US market, you can see it's a lot higher consistently. The average is north of 20% over the long run, and it's currently running well above it's okay well above what the Australians experience. And then you have on the right hand side bottom sort of prime arrears prime. To define prime, prime is a mortgage where the borrower has a salaried job. Every week or every month they receive the same income from their job, their employee to whether, say, a company or a business, and they're getting the same money every week. They don't have any black marks against their name from a credit perspective. They've never missed a bill, they've never defaulted on anything. and the loan to value ratio of their mortgage is less than 80%. They're the three main determinants of what's a prime mortgage. Anything that's not classified as prime in the Australian context with regards to APRA is non-conforming. For example, if you're a self-employed doctor, lawyer, accountant, or anything like that, and then in solid professions that earn good income, albeit from one month to the next, would be variable, they are considered non-conforming. Theoretically the banks don't lend to people like that. They then go to what we call a non-bank originator, which is the companies I mentioned earlier, the RedZed, Liberty’s, and so on. Prime versus non-conforming in Australia mean a lot different than say the US versus prime versus subprime. Subprime is a much more negative, I guess, if I could use that term, classification. A little bit more detail about the historical performance and dynamics of a US mortgage versus the Australian mortgage. A US mortgage, your interest payments on your primary residence are tax deductible. Any profit you make when you sell your primary residence is taxed. Because of these two dynamics, you are incentivized to maintain your loan to value ratio as high as you can. And I think the average is about 85% LVR in the US mortgage system compared to, say, in Australia, where it's about 45% in secondary markets. Mortgages in the US are typically non-recourse. Now it does vary state by state. So this is a very generic commentary here. You compare that to the Australian market, and yes, this has changed recently because of the budget but mortgage payments on your primary residence are not tax deductible, and profits on your prime residence are not taxed. So roughly 70% of mortgages in Australia are owner occupied. The balance of 25, 30% is investment. So that's a different dynamic. Further, as a result of those dynamics, you are incentivized to pay your mortgage off as quickly as possible because you're building up equity that's essentially tax free. and that's what we see in Australian mortgage. The average mortgage in Australia is written up to 30 years, but on average are repaid within nine years or refinanced within nine years and with RMBS securities, and I'll go a little bit more detail on how they're structured in moment, but the weighted average life of these securities is around three and a half years. So, we invest in an RMBS today, usually within 18 months of us investing, we start to amortize our exposure because people start paying their mortgages back. and then with three and a half years we're paid off. So again, very good risk return dynamics. and the last thing with regards to Australia mortgages, we are full recourse. So you can't just walk away from your mortgage. if there's a shortfall, the bank will come after you, your first born, your car, your kidneys, whatever, they'll take it. With regards to the US mortgage, you know, there's terms through the GFC called jingle mail. Once you're in negative equity, you can just walk away. You're incentivized to walk away. The bank can't come after you and chase your other assets. So there was a thing, jingle mile, where people put the keys to their house and just mail it back to the bank. Come and get me, you can't. So if you look at the bottom left-hand side there, you'll see between 2000 and now, loss rates on RMBS have ranged from two and a half percent prime to seven and a half percent non-conforming. Now that's prime. That's that's people who have very good jobs and that sort of thing. You look at the Australian market, there has been zero loss across both prime and non conforming over the same period. So no rated RMBS security has ever made a loss or a capital loss that hasn't been cured through the history of RMBS. And I've been doing RMBS since ninety six, which is pretty much when the market took off. A little bit more detail about the resilience of the market here. and there's a sort of commentary from the RBA during or post the GFC on mortgages and sort of talking about the loss rates that have been seen elsewhere versus here where it's virtually donut. The chart on the left there, the data's a little bit old, it sort of ends in 2014, but it covers a very important 30-year period there. And you can see in '94, the last global recession before the GFC inspired one. But you can see the Australian loss rates or non-performing housing loans is very, very static and stable. Whereas you can see the volatility in other markets such as the US and UK, we just don't have that volatility, which is encouraging. Bottom right hand side, this shows you historical arrears rates across the non conforming market. So we can see back in the early noughties it did get as high as twenty three percent, which I mentioned. Even when it hit twenty three percent back then. No RBS security lost any money in a capital sense. There's volatility in market valuation, but there was no loss of capital through default of underlying mortgages and that sort of thing. Into the GFC, areas were rising, you know, 15%, still no losses. And then post the GFC, the underwriting standards and the regulatory oversight has really improved. That's why we have such strong and consistent performance through time across the asset class. So why do we like RMBS? Each RMBS deal typically has about a thousand lines. As a security holder, we get a coupon every month, which is based on the bank bill swap rate plus a predetermined margin. As I mentioned, floating rates, so it's immune from inflationary pressures. Historically low realised loss rates, as I said, or virtually zero. and then structural protection. So we get paid before the originator gets paid. They don't receive any of their money back. They don't get their equity back until we're repaid in full. So the Liberty’s, the RedZeds, Peppers, for them to get paid, we need to get paid first. And then the right hand side is the secret source as we call it, which is the credit enhancement. There's multiple layers of protection within a structure. And the next slide I'll go into the structure and how it works in a bit more detail. But there's what we call an excess spread capture. We just build a reserve account to cover any losses. There's subordination. You can pick what layer of the mortgage pool you invest in. And then in some instances there's more insurance, which is which is less common in non-conforming, more common in prime, that provides you a layer of protection as well around losses. This is what an RMBS looks like. On the left hand side is a rough and dirty, what an RMBS deal looks like. There's class A through to class G. Class A is the highest ranked, typically rated triple A. Sometimes there's three layers of triple A with varying structural dynamics. Class B, which is double A, which is the same rating as a major bank senior bond. Then you go class C D E and F. The ratings change from A, triple B, double B, single B, and then down to equity, the unrated tranche, or theoretically, the first loss piece. As you can see, a thousand mortgages in that structure. It doesn't mean that if you buy the class E note or the class D date, you have a select percentage or a select number of mortgages allocated to you. You have a floating exposure to a thousand loans. Now if the thousandth loan or one of those loans defaults or goes into arrears, the losses start at the bottom and work their up. now keeping in mind that the loan to value ratio of a of a mortgage is typically on a new structure about 65 to 75 percent. Borrowers typically have 25 to 35 percent equity already in their house. soif there is a major cyclical downturn, we would need to see house prices fall on average by 25 to 35 percent and the borrower to default before we were at risk of being impacted from a capital sense. On the right hand side is what a major bank's balance sheet looks like. And I just want to highlight that an RMBS is very similar to a bank's balance sheet and vice versa. Another way of looking at a bank's balance sheet is it's just one big RMBS. Major banks and the regional banks, such as Bendigo Bank and Bank of Queensland, their main asset pool is mortgages, roughly 80%. At the very bottom is the equity piece, so the shares you buy in the share market. Then there is the hybrids, which are being phased out. But then there's the tier two, the subordinated bonds, which if you look across the rate A-Rough and dirty, similar to the class C notes on RMBS deal. Then you've got senior debt and deposits, which is just different layers of the capital stack. And whereas a bank is exposed to commercial property and housing, RMBS structures are exposed only to residential housing. We can choose which layer of the stack that we want to invest in. I've given you some rough yield coupons, given prevailing credit spreads and BBSW rates. Let's take the triple B tranch, the class D, you could get 6.3% to 6.5% on thatFor roughly three, three and a half year exposure. If you compare that to a triple B corporate or bank paper in the market, you're getting a roughly 100 basis points more than what you would for something else that was a bit more vanilla. The argument for that, why you get more spread, some people would attribute that to a complexity premium because RMBS are all a bit more complex than, say, vanilla bond issued by Westpac, or sorry, Westfarmers or Woolworthsand then there is also the argument there is a liquidity premium added to this because RMBS structures are not as liquid as say bank paper. That used to be the case. now I'm not saying that a double B rated RMBS tranche is as liquid as a bank senior or subordinated bond, but they are traded. You can buy and sell them in secondary markets, and increasingly we are seeing trading banks, global trading banks coming to Australia and trading this paper in secondary markets. So if we were forced to sell for whatever reason, there is a market for us to sell them. and just in the middle is just an example of the investor base. This is not just a random part of the market where a few small fund managers invest. There are some big global and systemic fund managers active in this space quite aggressively and deeply into the broader market. And we also see a lot of foreign investors come into the RMBS market, especially out of Japan and Europe as well are very active in this space. Just a bit of a comparison and I don't like to kick private credit when they're down, but for the record, Mutual is not active in private credit and by private credit I mean the stuff you see in the AFR and all the coverage that ASIC and everyone's looking at. We do a small smattering of what we call warehousing, which is doing RMBS before it becomes a public deal. So, it's technically private. but it's still backed by first ranked mortgage over property and the like. So, a different sort of risk profile. But anyway, private credit, often based on model pricing, it is illiquid, often unrated and very opaque. There's been a lot of talk and focus on the transparency of the underlying assets. It's pricing often left at par. Sometimes you have coupons accruing, all those sort of bits and pieces. Whereas the RMBS market is priced daily and independently and transparently. It is liquid. Is traded in over-the-counter markets, as are all bonds in the Australian market. It's publicly rated by any of the three major rating agencies, S&P Moody’s or Fitch. It's very transparent. We receive regular monthly reports on the state of the underlying mortgage pool that we've invested in. And when an RMBS deal is done, say it starts with a thousand loans, loans are not replaced. Once a loan is paid off, whatever reason the underlying borrower goes and refinances, gets a better rate elsewhere, that mortgage is repaid, and the capital returns to the borrower, to the investors such as ourselves. And this is why RMBS pools typically have an average life of three and a half years, because people refinance, chase cheaper deals, and the money comes to us first before going to the equity holder - he RedZed’s and Liberty’s and so on. So that's a key feature as well. Just a bit more detail around why it's I think an area that advisors should look at is there are a lot of cash balances in the market are elevated. There is a degree of uncertainty. You know, we looked at so yesterday we passed the financial year end and the ASX 200 is up only 1.2%. So not exactly a great performance for equity with a lot of uncertainty going forward, whereas these sort of products, capital secure and you will generate solid income and consistency. Going forward. And we would expect sort of our high yield fund, which invests in extensively in RMBS and ABS. You know, your 12-month returns are running around 9% with very minimal capital downside. As an alternative to private credit, and we also see a lot of people looking at RMBS as an alternative to hybrid capital. Now, the challenge for a lot of investors is RMBS is not available to retail investors. It is a wholesale or institutional market. The only way they can really invest in it is through a managed fund. There are some ETFs out there, but they're mainly triple A level, they don't give you the same return. but nevertheless it is a liquid market underlying it. Our own higher yield fund has daily pricing, is has daily redemptions and applications and the like. What could go wrong? I had a meeting this morning with a client who asked these questions, as you would expect, given the budget, and that we're seeing house prices have come off 3%, 3.2% in Sydney as of June. Over the last three months, Melbourne's off a bit. Historically, through housing cycles, on any rolling 12-month period, the worst performance in house prices at a national level we've seen is typically around 10% downside. If you look at the GFC, you look at COVID, rolling 12 month return, the worst has been around 10%. Keeping in mind the weight average loan value ratio on these things is around 65 to 75%. So yes, down 10% versus equity in the individual homes of around 65-75% at the mortgage level. What could go wrong? I mean, a severe recession would obviously be a major headwind for at least sentiment, not necessarily the underlying performance. We saw an unemployment shock that would I mean people pay their mortgage while they have their job. Importantly, unemployment 4.4% earlier this week. The post-GFC average for unemployment is 5.6. We're more than a percent under that. The long-run average is about 6.7%. We are well below the long-on average. and employment's holding up pretty well, despite sort of GDP growth being pretty anaemic. It's still positive, but not as strong as it could be. A housing downturn, obviously. There's been a lot of press, a lot of coverage about the structural dynamics of the Australian housing market. I saw a statistic the other day since the Labour government, Federal government came to power, we've added one point four million immigrants to the country. Without any bias towards immigration policy or whatever, regardless, one point four million people need to be housed. And as an economy we are not building enough houses to cope with the rising population. So that causes in basic economics 101 supply versus demand. Demand greater than supply, prices go up. and that demand won't change, but supply is still being constrained. As a result, that provides, I guess, a floor, if you will, over the next twelve to eighteen months where a lot of forecasters are suggesting house prices could fall up to 10%. Spread widening, we saw this post the Iran war. We saw credit spreads move wider and that sort of caused a very, very modest capital decline, capital price decline, but that's normal. and those spreads have come back, i.e. capital gain. So again, not a major concern for us at the moment. And then there's a liquidity event. COVID was an example, GFC is an example. Donald Trump announcing tariffs last April, or actually last year, causes a shock to the system and liquidity dries up. So all those things aside, I think it's other key things to remember. It is, I would say, systemically important. So Australian banks, I'd say, are systemically important, i.e., during times of crisis, the government steps in to support them. We saw that with COVID, we saw that with GFC. The RMBS market has also attracted government support. Through COVID, the AOFM. the government's funding arm bought RMBS paper to ensure the continued funding of that market. While RMBS funding for mortgages is modest in the grand scheme of things, the estimates roughly around seven to ten percent of mortgage funding, it's still a major part of the market. It lends to parts of the market that the banks don't touch. So politically, there is a will, if you will, to support it. Fundamentally different to the US, touched on that earlier. Credit enhancements provide plenty of protection. So, for all the negative headlines you see in the paper about house prices, these things can withstand some pretty severe downside. And I'll go through that in moment in a separate chart. And they provide good portfolio diversification from an income perspective. If income is key for you or your clients with capital preservation, also a strong desire, then these are an asset class thatyou should look at as well. And lastly, there are floating rate structures. So more interest rates are potentially going up again, depending on which view you have. I think Westpac has two more rate hikes in the in the can, other banks one, some none. Either way, we're still in the rising and inflationary environment. There's risk to higher interest rates. These are floating rates, so your income improves and you don't have the duration hit or capital hit from a duration position. Still plenty of positives to go of the asset class and it is continuing to grow and has very strong support in in the institutional space. Just some very broad fundamental charts here. bottom left shows you the arrears number first is unemployment. As you can see, not a huge or easily observable correlation there. More observable is the is the next one to the right, which shows you arrears versus interest rates. Interest rates have risen strongly from 2022 onwards, obviously given inflation. But as we can see, yes, arrears have gone up, but not by as far as you might be expecting. And then on the top two charts, the same data, just in a scattered plot form. Key points, I think, is the black dots. That's the post COVID data. And as you can see, unemployment has gone from three to seven percent. yet the arrears rate stayed well below long on average, and the same with interest rates stay well below long average. And that's a function of the improved underwriting standards we've seen post GFC, and basicallyregulatory oversight and like, which has really, really helped. How bad can it be? This is an actual deal we looked at earlier in the year. Sapphire 2026-2. So that's the name of the trust. This one has a 1,300 loans, roughly a billion dollars, average loan size 765,000. and that table at the bottom left shows you and I've highlighted a particular part. So the B-rated tranche, which has credit support below it of 0.4%. if house prices fall. 10% and mortgages in that pool, or 27% of that mortgage in that pool default, the capital is still safe. That's just giving you this sense of how much these things can withstand. Now, this also assumes the drop in house prices and the default rate happens all at once. It just doesn't happen. So again, these things are designed to withstand very, very strong, I'm sorry, very, very negative dynamics. Before I go into the last slide, the thing, some data I'd sort of like to leave you with. Since the 1980s, the cumulative loss rate from mortgage lending from the banks is 0.02% of what they've lent. To put that in context, that's a $20 loss for every $100,000 lent. Now, if you look at what the non-bank originators, this is the unregulated part of the market. Their loss rates in the last or before the or late 90s onwards is around a similar figure, some a little bit high, but not much. On average, $20 for every $100,000 lent has been lost through mortgage lending. That's very, very, very low. And again, a reflection of the strength and quality of the underlying assets in these pools. Some myths vs reality. Again, I've touched on a lot of this stuff. RMBS caused the GFC. No, it's not right. It was US subprime lending caused the problem. And I'll give you an example actually. There was a lady in Los Angeles who was 85 years of age and had repaid her mortgage 20 years prior to the GFC, and a rather unscrupulous mortgage broker convinced her to remortgage her house at 95%. She lost her house within 12 months. So it's an example of the US system versus the Australian system. We're much more regulated. We have 12 banks that control 90% of the market. In the US, you have six, seven thousand banks, and you have many, many number of defaulting banks in finance companies every year. All securitization is risky. No, structure matters. So. we spend as much time on the structure as we do the underlying loans, the originator, all those bits and pieces. We don't just look at the pool of assets and go, yep, that's ours. That's our source of repayment. We look at the history of the borrower of the lender, how good they've been through the cycle, what their arrears rates are versus the broader market. House prices must rise. That is a myth. we've saw through COVID house prices fell 10%, arrears rates still stayed below the long and average. I think they peaked about 5% versus an 8% average. and these transactions are designed to withstand stress. The GFC taught a lot of people lessons. and we're just stronger through it. Only institutions can access it. Yes, that's correct, but through managed funds you can access these securities. there are several managers out there who can do it. we would obviously promote ourselves. try our website, there's plenty of information there or reach out directly. There's our funds. There's four of them. Just a bit of a product flog. the bottom two funds have RMBS in them. and there's the fee structure. So the both of them are rated recommended by Zenith and Lonsec. the income fund, so the credit fund's been around. We actually launched that March 2020, which is great timing, but that fund has doubled in size. You know, performance has been very strong. And the high yield fund was launched a year earlier. Sort of that's five hundred and fifty million now. and performing very, very well. So I will leave it there. John, any comments you want to make. John Clothier (37:06.038) No, thanks very much for that. It's a pretty comprehensive play by play there of what's available within the mutual limited portfolio. I think pointing out some of those fundamental differences between the market here and in the US and how stable it has been in that environment, the return for the risk taken on board's been a a pretty handsome trade. And and I think, especially in the current environment, that that consistent access to money. the no buyer sale spreads, the daily liquidity for people to get in and out is becoming more and more important with with some of the other developments that we've seen in the market. So thank you very much for your time. If anybody has any questions, please r reach out to any of your business developers at copia and we're happy to provide you with any more information on any of the strategies within mutual or more broadly within the Copia stable. Thanks very much. Scott Rundell (38:02.2) Thank you.

“Patriotism is supporting your country all the time, and your government when it deserves it" - Mark Twain Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 14th August): Stocks (ASX 200 ↓1.60%, S&P 500 ↑0.36%, NASDAQ ↑0.14%) Bond Yields (ACGB3Y 4.53%, ↑ 4 bps / ACGB10Y 5.01%, ↑ 8 bps) Bond Curves (A$ 3s10s +48 bps, ↑ 4 bps) Credit Spreads (Major Bank 5Y Senior +63 bps, ↓1 bp / Tier 2 +127 bps, ↑ 4 bps) Oil (Brent US$88.52/bbl, ↑5.95%) Gold (US$4,373/oz, ↑0.73%) The Payrolls Shock: When the Data Breaks, Markets Listen Executive Summary Global markets spent the week digesting a benign inflation signal and a deteriorating growth signal at the same time. US July CPI landed exactly on expectations at 3.4% headline and 2.5% core, both lower than June, and producer prices were softer still — yet retail sales fell 0.6% and the control group dropped 0.4% against expectations of a 0.3% gain. The RBA held the cash rate at 4.35%, as universally expected, alongside its Statement on Monetary Policy. The statement remained hawkish, supported by the post meeting press conference. Markets split accordingly. US short-dated yields fell while the 10-year rose, the ASX 200 shed 1.6% as China's PMIs sat in contraction, and credit spreads ground tighter. Brent jumped almost 6%. For investors, the message is that carry, not capital gain, is doing the work. Cash rates near 4.35% and investment grade spreads near one-year tights leave short-dated, high-quality income looking better rewarded than equity risk. Market Overview The dominant narrative: disinflation without demand If there was a single organising idea for the week, it was this — the inflation problem is visibly improving, but so is the growth story, and not in a good way. The US July CPI report was as clean as central bankers could hope for. Headline inflation eased to +3.4% YoY from +3.5% YoY, core to +2.5% YoY from +2.6% YoY, and both monthly prints matched consensus exactly (+0.1% and +0.2%). Producer prices were softer again: final demand was flat month-on-month against a +0.2% forecast, and the annual rate collapsed from +5.5% to +4.7%. Geopolitics and the energy shock - Brent crude rose 5.9% on the week to $88.52 as the situation with Iran and the Strait of Hormuz remains uncertain, which will keep oil prices elevated and weigh on inflation. The catch is that the American consumer appears to be running out of road. Retail sales fell -0.6% in July against expectations of a +0.1% gain. Excluding autos and gas, sales fell -0.2% where a +0.3% rise was expected. The control group — the measure that feeds most directly into GDP — declined -0.4% after a +0.4% gain the prior month. That is not a rounding error; it is a genuine break in trend. The labour market data pointed the same way. Initial jobless claims rose to 209K against a 202K forecast. Most tellingly, real average hourly earnings fell -0.2% YoY and real weekly earnings rose just +0.1%. When real wages stop growing, consumption is eventually funded by savings or credit — neither of which is a durable base. An awkward wrinkle in the inflation data - one detail deserves attention because it complicates the disinflation story. Core producer prices (PPI) are running at +4.2% YoY while core consumer prices are at +2.5% YoY. That is a wide gap, and it can only resolve in one of two ways: either producers absorb the cost pressure and margins compress, or the pressure eventually passes through to consumer prices. Neither outcome is friendly to the "inflation is solved" thesis. We would treat the current disinflation as real but not yet secured. The RBA held at 4.35% on 11 August, matching consensus, and released its quarterly Statement on Monetary Policy the same day. The statement and post meeting press conference were hawkish. Domestic activity data supports a cautious stance. NAB business confidence deteriorated to -6 in July from -5, though conditions ticked up to +4 from +3 — a soft but not alarming combination. Housing finance told a sharper story. Total home loan values fell 5.2% in the June quarter, with investor lending down 10.2% against a 3.0% decline the prior quarter. Restrictive policy is transmitting to credit growth, which is precisely what it is meant to do. And of course, the Federal Government’s tax changes are having a meaningful impact with major banks reporting 15% - 20% drop in mortgage applications since the budget. Europe quietly improved. Second-quarter GDP grew 0.4% QoQ and 1.0% YoY, in line with forecasts. Industrial production returned to positive territory at +0.1% year-on-year against a -0.6% expectation. China moved the other way. The most recent official readings showed manufacturing PMI at 49.2 against a 50.1 forecast, non-manufacturing at 49.0 and the composite at 49.3, down from 50.6. All three sit in contraction. Industrial profit growth decelerated to 15.1% year-on-year from 21.1%. For an Australian investor, this is not an abstract data point. Equity Markets Australia's 1.6% decline stands out because it came in a week when US equities rose. The most plausible explanation is the ASX's structural exposure to Chinese industrial demand at a moment when China's PMIs are in contraction across manufacturing and services. Sector performances support this explanation with Materials down -1.77% on the week, while bank reporting and weakening mortgage growth weighed on the Financials sub-index, down -3.23% on the week. A +2.84% rally in energy stocks, buoyed by surging oil prices, eased the broader pain somewhat. Valuation: the observation that matters most - the Australian equity risk premium has effectively disappeared. The ASX 200 trades on a forward earnings yield of 5.34%. The 10-year Australian government bond yields 5.01%. Investors are being compensated approximately 33 bps for taking equity risk over a risk-free government bond. Historically, that compensation has been measured in whole percentage points. In the US, the premium is negative. The S&P 500's forward earnings yield of 4.61% sits below the 10-year Treasury at 4.69% — a negative 9 bp premium. For the NASDAQ, at a 3.40% earnings yield, the gap is negative 130 bps. Two honest caveats. First, franking credits materially improve the after-tax position of Australian equity income for domestic investors, and the raw 3.26% ASX dividend yield understates the grossed-up return. Second, a compressed equity risk premium is a statement about expected returns over years, not a timing signal — markets can sustain thin premia for extended periods. But as a guide to where the risk-reward sits today, the numbers are unambiguous: investors are being paid very little to move up the risk curve. By contrast, Europe at 15.9x and Hong Kong at 11.3x are the only major markets trading at multiples that leave visible room for disappointment. Europe's improving data makes that combination more interesting than it was a quarter ago. Fixed Income & Credit Australian yields moved higher on the week. The curve is modestly positive — 48 bps from three to ten years — and the 10-year is holding above 5.0%, near the top of its one-year range of 4.10% to 5.12%. For income-focused investors, this is the most important number in the report. A 5.01% yield on a AAA-rated sovereign bond is a genuinely different proposition to what was available a year ago at 4.21%. Duration has gone from being a source of return-free risk to being properly compensated. We would still add it gradually rather than all at once. The long end faces two identifiable headwinds: an energy price impulse and, in the US, a fiscal picture that is deteriorating faster than expected. US Treasuries: a revealing twist - the US curve did something worth explaining. The two-year fell 2.6 bps while the ten-year rose 4.7 bps, steepening the curve by roughly 7 bps to 52 bps. This is the market saying two things simultaneously. The front end responded to weak retail sales and rising jobless claims by pricing a softer policy path — the rational response to a slowing consumer. The long end went the other way, and the likely reason arrived on 13 August: the July federal budget deficit came in at $432.3bn against a $346bn forecast, versus $291.1bn the prior month. A deficit that large means more bond supply, and more supply at the long end means a higher term premium regardless of what the growth data says. The 6% oil move would have reinforced this. The lesson for clients is that long-end yields are no longer a pure function of the inflation and growth outlook. Fiscal supply is now an independent driver, and it does not respond to weak economic data the way policy rates do. This is why we would be careful about assuming long bonds will reliably hedge an equity drawdown. Looking across different asset classes, the cash rate is at 4.35%, floating rate bank credit offers ~5.50% to ~6.10% across senior and subordinated, which compares favourably to the ASX 200’s 3.26% dividend yield. The blunt conclusion is that investors do not need to take equity risk to generate a solid income return in the current environment. That has not been true for most of the past decade. More on the RBA…the board left the cash rate unchanged at 4.35% in a unanimous decision, judging policy to be somewhat restrictive after three increases this year. The statement noted that inflation picked up materially in the second half of 2025 and both headline and trimmed mean measures remain too high, with the Board noting also that some of the increase reflects genuine capacity pressures rather than temporary factors (i.e. oil prices). Tighter financial conditions are transmitting broadly: money market rates and bond yields have risen, the exchange rate has appreciated, consumer spending growth is slowing as expected, housing prices are falling in some capital cities and new housing loans have declined noticeably, and labour market conditions have eased slightly more than anticipated. Against that, business debt and investment growth is strong and trading partner growth has beaten expectations as AI-related investment outweighed conflict-related drag, while weak productivity continues to constrain potential growth. The Board expects inflation to remain elevated for some time and does not see it returning to around the midpoint of the target band until late 2027, with upside risks to that projection. It has chosen to hold while it assesses how the economy evolves but stated explicitly that it will raise the cash rate further if upside risks materialise. Outlook The most probable path from here is one of continued gradual disinflation accompanied by decelerating growth — the classic late-cycle configuration. US inflation is falling on both consumer and producer measures. US demand is weakening. Europe is modestly improving from a low base. China is contracting. Australia sits with a restrictive policy rate and visibly slowing credit growth. In that world, policy rates drift lower eventually rather than imminently, long-end yields stay stickier than the growth data alone would justify because of fiscal supply, and credit spreads at current tights have more room to widen than to compress – but can also stay firmly at prevailing levels also, which is our base case. The RBA appears comfortably on hold. The 11 August decision changed nothing and markets did not reprice. Two upcoming releases could change that: the Q2 Wage Price Index on 19 August (consensus +0.8% QoQ and +3.2% YoY, easing from +3.3% YoY) and July employment on 20 August (consensus +12K after a remarkable +76k, with unemployment steady at 4.4%). A wages upside surprise, particularly alongside consumer inflation expectations at +4.7% YoY, would reopen a conversation the market currently considers closed. A sharp employment miss would open the opposite one. The Fed faces a genuinely difficult set of signals: inflation is behaving, but the consumer is not. Weak retail sales and rising claims argue for easing; a +4.2% YoY core PPI rate and a $432 billion monthly deficit argue for patience. We would not put high confidence in any particular path.

“Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac?" - George Carlin Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 7th August): Stocks (ASX 200 ↑3.20%, S&P 500 ↑3.58%, NASDAQ ↑5.19%) Bond Yields (ACGB3Y 4.49%, ↑ 5 bps / ACGB10Y 4.93%, ↑ 8 bps) Bond Curves (A$ 3s10s +47 bps, ↑ 3 bps) Credit Spreads (Major Bank 5Y Senior +63 bps, ↓1 bp / Tier 2 +120 bps, ↓ 3 bps) Oil (Brent US$83.55/bbl, ↓7.29%) Gold (US$4,341/oz, ↑7.30%) The Payrolls Shock: When the Data Breaks, Markets Listen Executive Summary The week ending 8 August 2026 was defined by a single, extraordinary data point: US non-farm payrolls fell by 23,000 in August — the first negative monthly print in years and a result that sent shockwaves through global financial markets. Against a survey of positive 80,000, this represents a miss of over 100,000 jobs. The immediate market response was decisive: US Treasury yields fell sharply, gold surged 7.3% to $4,342, equity markets rallied strongly on the expectation of imminent Federal Reserve easing, and the Australian dollar firmed modestly. The ASX 200 rose 3.2% and the S&P 500 gained 3.6%. In Australia, the domestic data was constructive. The trade balance recovered strongly to a $1.929 billion surplus, household spending remained firm, and PMI readings accelerated further into expansion. Australian bond yields rose modestly — a divergence from the US — reflecting domestic resilience. For income-focused investors, the payrolls shock materially advances the timeline for Fed easing and raises important questions about portfolio duration and floating rate positioning. Market Overview A labour market crack opens in the United States — and markets reprice immediately The week's defining data point was US non-farm payrolls falling to −23K in August — the first negative monthly print in years, against consensus estimates of +80K. The three-month average has now fallen to just +20K from +77K previously: this is a pattern of deteriorating labour demand, not a statistical anomaly. The significance for monetary policy is direct. The Federal Reserve's dual mandate encompasses both price stability and maximum employment. For two years, inflation dominated that conversation. A negative payroll print shifts it — emphatically — toward employment, and markets correctly read this as materially accelerating the timeline for rate cuts. The US ISM manufacturing PMI at 55.6 complicates the picture. Manufacturing activity expanding at its fastest pace in years while overall employment contracts is unusual and likely reflects strength concentrated in policy-incentivised sectors rather than the broader economy. The ISM services employment sub-index at 47.4 — firmly in contraction — is more consistent with the payrolls data and may be the more meaningful signal. In Australia, the domestic story was genuinely different. The trade balance swung from a $2.4bn deficit to a $1.9bn surplus, exports surged +9.6%, household spending grew +6.0% YoY above consensus estimates, and PMIs continued to accelerate. Europe's data was broadly constructive, with Eurozone CPI at +2.9% YoY and the composite PMI steady at 52.0 — positioning the ECB as the central bank closest to a rate cut among major economies. Investor sentiment treated the payrolls shock as net positive for risk assets — the "bad news is good news" dynamic that recurs at turning points in the rate cycle, as falling yields and rate cut expectations offset the underlying growth concern. Understanding this dynamic, and its limits, is essential for navigating the weeks ahead. Equity Markets Global equities rally on rate cut expectations — with notable exceptions The US payrolls shock drove equities higher through a single mechanism: increased rate cut expectations reduce the discount rate applied to future earnings, lifting valuations. The NASDAQ's +5.19% gain — the largest of any major index — reflects this most acutely, as high-multiple technology stocks benefit most from falling discount rates. The ASX 200's +3.20% gain had a dual tailwind. The global rate cut narrative provided the same valuation lift, while Australia's own constructive data — a trade surplus recovery, household spending above survey, and accelerating PMIs — independently supported domestic earnings expectations. At a forward PE of 18.3 times and an earnings yield of 5.5%, the ASX is not cheap, but the equity risk premium over government bonds remains positive (but near historical lows). Regionally, the Hang Seng's -0.84% decline was the notable exception, and the reason is clear: China's domestic challenges are overriding the global risk-on impulse. Both manufacturing and non-manufacturing PMIs remained in contraction, and China's import growth moderated sharply — a direct negative signal for Australian commodity exporters given the volumes of iron ore, coal and LNG involved. Within the ASX, the expected rotation was toward rate-sensitive sectors — REITs, utilities and infrastructure — while resources performed well on the week despite weaker China weakness. Financials sit in between: lower rates eventually compress margins but reduce credit stress simultaneously. Banks have held up also, despite plunging mortgage applications, down 15% - 20% on the back of the Federal Governments revenue grab, pardon me property related tax changes. The broader valuation tension is worth naming plainly. Markets are pricing a soft landing — rate cuts arriving just in time, earnings intact. The US payrolls data suggests something different: a contracting labour market is one where consumer spending and corporate revenues are genuinely at risk. The "bad news is good news" dynamic holds only as long as the slowdown remains mild enough to be reversed by easing. Investors should watch subsequent data carefully for signs that this assumption is being tested. Fixed Income & Credit A transatlantic divergence: US yields fall sharply while Australian yields rise Australian and US bond markets moved in opposite directions — a divergence that reflects two fundamentally different economic situations. In the US, the payrolls shock drove a decisive rally: 2-year Treasury yields fell 10 bps to 4.20% and 10-year yields fell 9 bps to 4.65%. That the 2-year moved this sharply on a single data release — without a Fed meeting or major policy communication — tells you how significant the payrolls number was perceived to be. In Australia, yields moved the other way. The 3-year ACGB rose 5 bps to 4.54% and the 10-year rose 8 bps to 5.01%, breaking back above 5.0% for the second time in the past month. Australian bond markets correctly read the domestic data — household spending at +6.0% YoY, private credit at 8.5% YoY, a recovering trade surplus and accelerating PMIs — as describing an economy that does not need immediate monetary stimulus, much to the chagrin of mortgage holders. The portfolio implication is direct: Australian investors with US Treasury exposure benefited from falling US yields while domestic bonds fell simultaneously. This is a useful reminder that the RBA and the Fed are running different policy cycles at different speeds and treating them as equivalent is an analytical error with real portfolio consequences. In Australian credit, spread movements were negligible — FRN spreads tightened 0.2 bps to 58.1 bps, fixed rate spreads barely moved. The total return data is the cleaner signal: the FRN index returned +0.11% while the fixed rate index returned −0.04%, a 15 bp weekly gap driven almost entirely by the rise in domestic yields. Floating rate outperforms fixed rate when Australian yields are rising — a consistent pattern throughout this cycle. Private credit growing +0.8% in July — above the +0.6% consensus estimate and accelerating to +8.5% YoY — is a significant hawkish data point for the RBA. Credit expanding at this pace is not consistent with monetary policy that has fully done its job of restraining demand. This number alone makes a near-term RBA cut very difficult to justify, so much so, markets are not pricing such in for the foreseeable future. Having said that, a couple of the major banks have advised of a 15% - 20% plunge in mortgage applications since the Federal Budget was announced, and associated tax changes. Consequently, credit growth will likely begin to moderate. For RMBS, the underlying collateral picture remains sound. Household spending at +6.0% YoY and the trade surplus recovery both signal a borrower base with the income and confidence to service debt. Further mortgage arrears data remains steady and well below historical averages. Australian RMBS continues to offer floating rate income, senior security, and high-quality collateral — a combination that remains difficult to replicate elsewhere in fixed income. Outlook Two economies, two stories — and the risks that cut across both United States: how bad, and how fast will the Fed respond? The August payrolls print of −23K demands careful assessment before drawing firm conclusions. Labour market data is volatile and subject to revision — the June miss was partly distorted by weather and later revised higher. But the three-month average of just 20K, down from 77K, suggests a genuine underlying trend rather than noise. The ISM services employment index contracting to 47.4 is consistent with this reading. The Fed now faces a genuine dilemma. Core PCE at +3.3% YoY and ISM services prices paid at 70.3 confirm inflation has not been fully resolved — yet a contracting labour market makes continued restrictiveness increasingly hard to justify. September is the next meeting, with a rate cut still not priced in. At this stage, markets are pricing a rate hike as more likely than a cut. Australia: resilient, but not immune. Household spending at +6.0% YoY, a recovering trade surplus, PMIs above 53, and private credit at +8.5% YoY describe an economy that is growing, not slowing — a clear divergence from the US. The RBA's next move is still waited to a hike than a cut, although a full hike is not probable at this stage. That said, Australia is not insulated from a US recession: the transmission channels — commodity demand, financial market contagion, business confidence — are real. China's sustained PMI contraction adds a second external vulnerability. Domestic resilience is a delay, not a shield. Cut pricing can accelerate fast if data begins to turn. The inflation puzzle. The US payrolls shock is disinflationary through wages — average hourly earnings fell to 3.2% from 3.4%. But services prices paid at 70.3 signals that businesses are still raising prices aggressively. Falling employment alongside still-elevated price growth is the early signature of stagflation — precisely the environment the Fed finds hardest to navigate. A cut into persistent inflation risks un-anchoring expectations; a hold into a contracting labour market risks a sharper downturn. There are no easy choices, and policy uncertainty will remain elevated.

“If Stupidity got us into this mess, then why can't it get us out?" - Charles Kettering (American inventor) Cartoon of the Week Source: www.hedgeye.com Movers & Shakers (week ending 31st July): Stocks (ASX 200 ↑2.33%, S&P 500 ↑1.05%, NASDAQ ↓1.78%) Bond Yields (ACGB3Y 4.49%, ↓ 22 bps / ACGB10Y 4.93%, ↓ 16 bps) Bond Curves (A$ 3s10s +44 bps, ↑ 6 bps) Credit Spreads (Major Bank 5Y Senior +64 bps, ↓2 bps / Tier 2 +123 bps, ↑2 bps) Oil (Brent US$90.12/bbl, ↓6.88%) Gold (US$4,046/oz, ↓0.12%) Inflation Cools on Both Sides of the Pacific — But the Complications Are Real Executive Summary The week delivered a genuinely pivotal set of data releases that shift the balance of probabilities for both the RBA and the Federal Reserve. In Australia, Q2 CPI rose just +0.6% for the quarter — below the +0.7% survey — with the trimmed mean at +0.8%, which annualises to approximately +3.2%. In the US, the FOMC held rates at 3.75% as expected, core PCE eased to +3.3% YoY, and US GDP for Q2 came in at 1.5% annualised — below the 2.0% survey. China's manufacturing PMI fell back into contraction at 49.2 for July, all three PMI readings contracting simultaneously for the first time since early 2025. For Australian investors, the message is both encouraging and nuanced: the inflation trend appears to be improving, but pipeline pressures from import prices, elevated credit growth, and China's deterioration create a complex backdrop. Australian government bond yields fell sharply, equities rallied, and credit spreads tightened modestly. The income case for quality fixed income and credit remains compelling — but a strategic pivot point is approaching. Market Overview The dominant narrative: disinflation is back, growth is slowing — and that is not a simple story The week's dominant theme is best understood not as a single headline but as a tension between two forces: the clearest evidence yet that the disinflation cycle is intact, set against a set of growth and pipeline risks that prevent any comfortable declaration of victory. Both the RBA and the Federal Reserve now have more room to sit on their hands — but neither has the luxury of moving quickly toward easing without risking a premature pivot that could reignite inflationary pressure. In Australia, the Q2 CPI data was unambiguously the most important domestic release of the week and arguably of the past several months. A quarterly headline CPI of +0.6% — below the +0.7% survey and less than half the +1.4% recorded in Q1 — signals a meaningful deceleration in price growth at face value, but the prior reading was impacted by oil prices. The trimmed mean reading of +0.8% for the quarter is even more significant for the RBA: annualised, this sits closer to the RBA’s target range, but still outside. The year-on-year trimmed mean came in at +3.6% — matching the prior and slightly below the +3.7% survey — confirming that underlying inflation is no longer accelerating and may be entering a sustained downward trend. The complication — and it is a real one — arrives in the form of the Q2 import price index, which surged +5.7% for the quarter against a survey of 0.0%. This is a very large, unexpected move and reflects, in part, the sharp rise in Brent crude oil prices observed through late June and July (from around $73 at end-June to nearly $97 at the recent peak), as well as AUD depreciation effects. Import price increases flow through to consumer prices with a lag of approximately one to two quarters. If this pipeline pressure is not offset by domestic demand weakness, Q3 CPI could surprise to the upside, undermining the progress demonstrated in Q2. The RBA will be acutely aware of this. In the US, the FOMC's decision to hold at 3.75% was expected, but there was some dissension in the ranks with three members voting to hike. Nonetheless, what probably matters more for investors is the continued easing in core PCE to +3.3% YoY, and the decline in the monthly PCE price index to −0.1% MoM — the first monthly decline since early in the tightening cycle. Personal spending for June rose just +0.3% MoM against a +0.4% MoM survey, and real personal spending of +0.4% MoM was at the lower end of recent months. Taken together, these readings paint a picture of a US consumer that is increasingly cautious, spending less freely, and generating less inflationary pressure at the margin. US Q2 GDP at +1.5% annualised disappointed against the +2.0% survey, though personal consumption of +3.2% was well above the +0.5% prior and the +2.3% survey — suggesting the consumer remains the primary engine of the US economy even as other components moderate. The genuinely uncomfortable number in the GDP release is the price deflator of +6.2% — more than 200 bps above the +4.0% survey. This reading, which captures broad economy-wide price changes, suggests that inflationary pressure in sectors not well-captured by CPI and PCE remains substantial. It is a significant counterweight to the more constructive monthly inflation data. China's July PMI data represents the clearest signal yet that the recovery momentum observed in the first half has stalled. With manufacturing PMI at 49.2, non-manufacturing at 49.0, and the composite at 49.3 — all simultaneously in contraction — the picture is one of broad-based softening rather than sector-specific weakness. This has direct implications for Australian commodity exporters, the AUD, and the broader regional growth outlook. Equity Markets Risk-on returns as inflation fears recede — but the composition matters The ASX 200's +2.33% weekly gain was among the strongest of any major global index, and the reason is straightforward to explain: Australia's Q2 CPI result delivered exactly the kind of inflation improvement that rate-sensitive equity markets need to re-rate higher. When the probability of additional RBA tightening falls — as it did materially this week — the discount rate applied to future Australian corporate earnings declines, which mechanically raises the present value of those earnings and pushes equity prices upward. This effect is amplified for the ASX's large weightings in financials, real estate and infrastructure, where earnings are directly tied to the interest rate environment. The ASX 200's forward PE of 18.3x — with an earnings yield of 5.5% and a dividend yield of 3.3% — sits at a level that is supportable if the current rate environment is at or near its peak. At 4.93%, the 10-year ACGB yield still provides meaningful competition for equities, but the equity risk premium remains positive (but still well below historical averages). If bond yields continue to fall as the inflation outlook improves, the relative attractiveness of equities theoretically improves. Globally, the picture is mixed in ways that are instructive. The NASDAQ's -1.78% weekly decline — against positive performance from virtually every other major index — reflects a continuation of the intra-market rotation we have discussed in recent weeks. Technology stocks, which carry the highest forward multiples, are most sensitive to two competing forces this week: lower discount rates (positive, as inflation falls) versus weaker growth expectations (negative, as US GDP disappointed – but also whether these companies will make meaningful returns on the vast sums of capex they have invested). On balance, the growth concern appears to have dominated for NASDAQ-weighted names. The S&P 500's more modest +1.05% gain — dragged down by the NASDAQ but buoyed by broad market participation — is consistent with this reading. Fixed Income & Credit A week of genuine progress: yields fall, spreads tighten, the rate cycle turn The Australian bond market's response to the Q2 CPI data was swift and significant. The 3-year ACGB yield fell 22 bps to 4.49% — one of the larger single-week moves in this cycle — reflecting a rapid repricing of the RBA's expected policy path. The 5-year yield fell 21 bps, and the 10-year fell 16 bps, creating a modest flattening of the yield curve at the shorter end as markets aggressively reduced the probability of further tightening. The interpretation of these moves requires care. A 22 bp fall in 3-year yields in a single week is large — comparable to the moves seen around major central bank decisions — and suggests markets are not merely noting improved inflation data but actively repricing the probability distribution around the RBA's next move. Before this week, the market was pricing the most likely next RBA move as a hold, with a meaningful tail probability of a further hike. After this week, the distribution has shifted decisively: the most likely outcome remains a hold, but the tail probability of further tightening has fallen sharply, and the probability of an eventual cut has increased in a meaningful way. However, we urge investors to resist over-extrapolation. The RBA will point to three factors that prevent any premature declaration of victory. First, private sector credit grew +0.8% in June (above the +0.6% survey), with year-on-year growth at +8.5% — the fastest pace in years. Credit growing this quickly is not consistent with a monetary policy that is fully doing its job of restraining demand and inflation. Second, the import price surge of +5.7% in Q2 creates genuine pipeline inflation risk for Q3 data. Third, even with the Q2 improvement, the year-on-year trimmed mean remains at +3.6% — above the top of the target band. In Australian credit, the week's moves were modest but directionally positive. FRN spreads (AusBond Index) tightened -0.7 bps to 58.3 bps, and fixed rate credit spreads tightened -0.8 bps to 76.4 bps. Both readings sit well within their one-year ranges — FRN spreads between 55.9 and 84.4 bps, and fixed rate between 68.3 and 103.2 bps — confirming that credit markets are pricing a sound, low-stress environment rather than any deterioration in issuer quality. Big 4 senior 5-year spreads at 64 bps — tightening -2 bps on the week — sit at the tight end of their one-year range, reflecting strong institutional appetite for Australian bank paper. Tier 2 spreads edging +1 bp wider to 122 bps is a negligible move that does not signal any stress. The US fixed income picture is more complex. The FOMC held at 3.75% as expected, and the accompanying data — core PCE at +3.3% YoY, monthly PCE at −0.1%, initial jobless claims at 197K — collectively imply the Fed's next move is more likely to be a cut than a hike. However, the 10-year Treasury yield rose +5.8 bps to 4.73% despite these constructive inflation readings — driven by the GDP price deflator's alarming +6.2% reading, which suggests broader price pressures in the US economy that are not fully captured by headline and core measures. This yield curve steepening (short-end falling, long-end rising) is a regime worth watching carefully: it can indicate either a growth re-acceleration or a re-emergence of longer-term inflation expectations. For income-focused investors, the strategic question that this week sharpens is now urgent rather than academic: as Australian bond yields fall and the rate cut horizon draws closer, how should portfolios be positioned between floating rate and fixed rate instruments? The BBSW rate fell only -4.5 bps to 4.50% — meaning the current floating rate income stream remains very attractive in absolute terms. Outlook A pivot is approaching — but the path there is neither straight nor guaranteed The RBA's August meeting. The Q2 CPI data has reduced the probability of any further RBA tightening and has shifted the conversation toward the conditions required for easing. While latest inflation data is encouraging, we do not expect the RBA be considering cutting rates any time soon. The most optimistic yet realistic medium-term outcome, for borrowers, is for policy to remain on hold. Another hike, while not fully price, remains a possibility. Perhaps not probable, but possible. The reasons are clear: private sector credit at +8.5% YoY is running too hot; import prices surging +5.7% in Q2 create genuine upside risk to Q3 inflation; and the RBA will require at least two or three consecutive quarters of in-band trimmed mean readings before gaining sufficient confidence to ease. The most probable scenario is that the RBA holds through 2026 and well into 2027, with any hope of easing conditional on the inflation data continuing to improve. The Federal Reserve's path. Core PCE at +3.3% YoY, monthly PCE at −0.1% MoM, and a labour market that remains fundamentally sound (initial claims 197K, still low by historical standards) give the Fed a credible basis for holding rates through the northern hemisphere summer. The GDP price deflator of +6.2% is a genuine concern that the Fed will not ignore — it suggests that inflationary pressure in the US economy has not fully resolved at the broader aggregate level, even as the monthly measures moderate. Futures markets are pricing the next move as a hike, at this stage priced in for Q1 2027. China: the most important variable for Australian investors. The July PMI data — all three readings in contraction — is the clearest signal yet that China's post-COVID recovery momentum has exhausted itself without establishing a self-sustaining growth trajectory. The structural headwinds are well-known: property investment down 18% year-to-date, FDI declining, household consumption cautious. The policy response — holding loan prime rates unchanged, modest credit stimulus — has so far been insufficient to reverse the trend. For Australia, the key questions are whether iron ore prices hold (driven by steel demand, which flows from Chinese construction and infrastructure spending) and whether LNG demand remains robust. We acknowledge significant uncertainty about both and would caution against any portfolio positioning that assumes a rapid Chinese recovery without clear policy evidence to support it. The pipeline inflation risk. The import price surge of +5.7% in Q2 and the PPI YoY acceleration to +3.6% YoY from +3.0% YoY are data points that complicate the otherwise constructive inflation narrative. These are producer-side pressures that historically lead consumer prices by one to two quarters. If Brent crude remains near $90/bbl — or moves higher — the Q3 CPI data (due in late October) could surprise to the upside, reversing some of the sentiment improvement generated by this week's Q2 results. This is the single most important near-term risk to the current market narrative, and investors should position for it with appropriate caution Is the US inflation improvement durable, and when does the Fed begin cutting? The June CPI and PCE data are genuinely encouraging — but the GDP price deflator of 6.2% is an uncomfortable counterpoint that suggests broader price pressure in the economy has not fully resolved. The Fed will require several more months of consistent data before moving. A cut from the Fed is not currently price in, with a hike more probably (per futures pricing).

“Two halves, two different worlds" July 2026 | For public consumption Twelve months ago, the consensus view was that FY26 would be the year duration finally rewarded the faithful, as the RBA worked its way through a steady easing cycle. For six months, that thesis held. Then it broke — comprehensively. The financial year split neatly in two. Through the December half, the RBA continued cutting, inflation appeared to be behaving, and the market priced a terminal rate materially below where we sit today. From January onwards, that narrative unravelled. Seventy-five basis points of tightening in six months is not a fine-tuning exercise. It is a central bank conceding that the disinflation it had declared was, at best, incomplete. For anyone holding fixed rate paper into that turn, it was a painful outcome. The AusBond Credit Fixed Index returned 2.75% for the year — less than cash, and less than the rate of inflation for much of the period. The ASX 200 managed 2.77%, similarly beaten by the bank bill index at 3.86%. Meanwhile the floating rate note (FRN) index returned 4.88%, and the gap between floating and fixed credit — 213 basis points — tells you almost everything about which risks were rewarded and which were punished. Against that backdrop, our funds delivered: Fund (net of fees) FY26 Vs B’mark Excess Target Excess Mutual Cash & Term Deposit Fund 4.09% 3.86% +0.23% +0.50% -0.27% Mutual Income Fund 5.51% 3.86% +1.65% +1.20% +0.45% Mutual Credit Fund 6.63% 3.86% +2.77% +2.20% +0.57% Mutual High Yield Fund 8.25% 3.86% +4.36% +4.50% -0.11% Benchmark is the Bloomberg AusBond Bank Bill Index, target is spread above the benchmark. Figures as at 30 June 2026 Every fund beat its benchmark. Two exceeded target, and two fell marginally short — the Cash and Term Deposit Fund by 27 basis points, and the High Yield Fund by 11 basis points. We'll come to why. The macro backdrop: the disinflation that wasn't The first half of the financial year proceeded roughly to script. The RBA eased, the market cheered, and commentators began drafting obituaries for the inflation problem. Bond investors extended duration. Equity investors extended multiples. The turn came from two directions at once, and neither was a surprise to anyone who had been paying attention. Oil Energy prices moved sharply higher through the first quarter of 2026 and have kept moving. Supply-side disruption met a demand picture that was more resilient than expected, and the flow-through to headline inflation was rapid — fuel prices first, then freight, then the broader goods complex. Central banks like to describe energy shocks as transitory and look through them. That is a defensible strategy when inflation expectations are anchored. It is a dangerous one when they are not, and by early 2026 the anchoring was looking a good deal less secure than the RBA would have liked. Housing The more troubling contributor, because it is the one monetary policy cannot fix. Rents and the housing component of the CPI have remained persistently elevated, driven not by excess demand for credit but by a structural shortfall in supply. Construction completions continue to run below household formation. Approvals have not recovered to the levels needed to close the gap. Labour and materials constraints in the building sector persist. This is a supply problem being addressed with a demand-side instrument, and the RBA has been explicit that it has limited tools available. Raising the cash rate does not build houses; if anything, higher financing costs make marginal projects less viable. The Reserve Bank is tightening into a shortage it cannot resolve, because the alternative — allowing the shelter component to keep pushing headline inflation higher — is worse. The combination pushed trimmed mean inflation back up through the first half of calendar 2026, and the RBA Board responded with three consecutive moves. Offshore, the picture rhymed: the US Federal Reserve confronted the same energy pass-through layered on top of tariff-driven goods inflation, and the easing cycle that markets had priced for the US evaporated in similar fashion. European growth stayed weak while its inflation problem reasserted itself — the worst of both worlds. China's property overhang continued to weigh on commodity demand, which helps explain why the ASX 200 went nowhere despite the energy complex performing well: the resources sector's exposure is bulk commodities, not oil. What worked Floating rate exposure Worked decisively. This is the point of the whole exercise. A portfolio built on floating rate notes does not care which way the cash rate moves, because the coupon resets. When the RBA turned in January, our funds' income increased. Fixed rate holders took a capital hit and then sat on below-market coupons for the balance of the year. The 213 basis point spread between the FRN and fixed credit indices is the price of a directional rate call that went wrong. We want to be clear that this is not a victory lap for a market call. We did not forecast a 75 basis point tightening cycle. We positioned so that we would not need to. That distinction matters, and it is the single most important thing we can tell investors about how these portfolios are constructed. Primary market discipline Issuance was heavy through the year, particularly among banks and financials, and heavy supply means genuine new issue concessions. Volatility around the policy turn widened those concessions further. We were selective rather than enthusiastic, and the second half, in particular, offered better entry points than the first. Subordinated and Tier 2 positioning The regulatory transition in the hybrid space continued to reshape domestic bank capital structures, and the Tier 2 market absorbed modest supply. Spreads held up well even through the rate turn — a reminder that credit risk and interest rate risk are distinct, and that a hawkish central bank is not, in itself, bad news for credit quality. The Credit Fund's 277 basis point excess return owes a good deal to that positioning. Not reaching There were pockets of the market where spreads compressed to levels that did not compensate for the underlying risk. We didn't own them. In a year where credit fundamentals held together, that discipline cost a little. Over a cycle, it is the whole game. Where we fell short The Cash and Term Deposit Fund's 4.09% represents a 23 basis point premium to bank bills — a respectable outcome for a portfolio whose first obligation is capital stability and same-day liquidity. It fell 27 basis points shy of target largely because of the shape of the year rather than its endpoint. Term deposit rates compressed through the first half as banks anticipated further easing, and while pricing improved sharply once the RBA turned, the fund carried those lower rates through maturities set in the December half. We deliberately kept terms short through the second half rather than locking in rates ahead of a tightening cycle we could see building. That decision cost basis points in FY26 and will earn them back in FY27. The High Yield Fund's 8.25% missed its 8.36% target by 11 basis points — a rounding error against a 439 basis point excess return over benchmark, but worth explaining. The fund held more liquidity than the target implies through parts of the first half, having judged that spread compensation at the tights was inadequate given rising policy uncertainty. That judgement cost 11 basis points. Given what we now see building in the inflation picture, we would make the same call again. Looking forward: the risk is not behind us We enter FY27 with a cash rate higher than it was six months ago and, on the evidence in front of us, a meaningful probability that it goes higher still. Oil is the immediate concern. Prices have continued to firm into the new financial year, and the pass-through to headline inflation operates with a lag measured in months, not quarters. If current levels hold — let alone extend — the CPI prints through the December half will be uncomfortable reading, and the RBA has already demonstrated its willingness to act. Housing is the slower burn, and the more intractable. The supply shortfall is a decade in the making and will not be resolved in a year. Until completions materially exceed household formation, the shelter component of the CPI will keep exerting upward pressure regardless of what the cash rate does. Investors should be sceptical of any forecast that assumes this component normalises quickly. Three implications for positioning First, duration risk is not cheap enough. Fixed rate credit has repriced, but not to levels that adequately compensate for the possibility of further tightening. We are not extending, although we don’t buy fixed rate bonds anyway, so not a large part of our daily pondering. Second, higher-for-longer is good for income. The uncomfortable truth for borrowers is the welcome one for our investors: a higher cash rate means higher coupons on floating rate paper, immediately and mechanically. The absolute yields available across our funds are better today than they were 12 months ago. Third, credit fundamentals will be closely monitored. Seventy-five basis points of tightening into an economy already carrying elevated household debt will eventually show up somewhere. It hasn’t not yet, and we aren’t not forecasting a credit event. But the margin for error in security selection is narrower than it was, and we are underwriting accordingly. For these reasons we specialise in APRA regulated banks and structured credit with hard first ranked security over underlying assets. The case for floating rate credit has never depended on a directional call on rates.That is precisely why we like it, and why FY26 unfolded the way it did for our investors while it unfolded rather differently for others. To our investors: thank you for your continued confidence. Beating a benchmark in a year when equities returned less than cash — and doing so through a policy reversal that caught most of the market leaning the wrong way — is the outcome these portfolios are built to produce.

“Thinking is one thing no one has ever been able to tax." - Charles Kettering (American inventor) Cartoon of the Week Source: www.hedgeye.com Funds Snapshot Movers & Shakers (week ending 10th July): Stocks (ASX 200 ↓0.28%, S&P 500 ↓0.61%, NASDAQ ↓3.32%) Bond Yields (ACGB3Y 4.72%, ↑ 23 bps / ACGB10Y 5.09%, ↑ 19 bps) Bond Curves (A$ 3s10s +37 bps, ↓4 bp) Credit Spreads (Major Bank 5Y Senior +66 bps, ↑1 bp / Tier 2 +121 bps, ↓1 bp) Oil (Brent US$96.78/bbl, ↑9.85%) Gold (US$4,052/oz, ↑0.88%) Australia Surprises to the Upside — While Bond Markets Sound a Different Alarm Executive Summary Australia delivered its most encouraging economic data in several months this week — but bond markets told a more sobering story. Employment surged by 76K in June, more than four times the consensus forecast of 15K, with the labour force participation rate rising to 67.0% and full-time jobs accounting for 29K of the gain. Business activity accelerated sharply, with the composite PMI jumping from 50.4 to 52.6. On the surface, this is the picture of a resilient economy. The complication is what happened to interest rates. Australian 3-year government bond yields rose 23 bps to 4.72%, and 10-year yields climbed 19 bps to 5.09% — the latter breaching the psychologically significant 5.0% level. BBSW also ticked up 7 bps to 4.54%. Globally, oil prices surged nearly 10% as Iran ceasefire tensions resurfaced, and US bond yields rose sharply. For Australian income investors, this week reinforced a critical message: the RBA's path to rate cuts has become considerably longer, but the income available today from quality fixed income and credit is genuinely attractive. Market Overview A dominant narrative emerges: "higher for longer" is back with conviction The week's dominant market narrative crystallised around a single theme: economies are more resilient than expected, labour markets are tighter than expected, and central banks therefore have less room to ease than markets have been hoping. In Australia, this message arrived with force. In the US, it arrived more quietly — but the direction was the same. The Australian employment report was the week's most significant piece of domestic data in recent memory. A gain of 76K jobs in June, against a survey of just 15K, is not merely a beat — it is a result that fundamentally reconfigures the near-term RBA outlook. Critically, the quality of the employment growth was strong: 29K of the new jobs were full-time positions, and the participation rate rose to 67.0% — its highest level on record — meaning the employment surge cannot be attributed to a smaller pool of job-seekers. More Australians are working, and more are actively looking for work and finding it. The Australian PMI data reinforced the employment surprise. The composite PMI for July rose from 50.4 to 52.6, with services accelerating sharply to 53.0 — its strongest reading in over a year — and manufacturing continuing to expand at 51.7. These readings describe an economy that appears to be picking up speed across both its goods-producing and service-providing sectors simultaneously. In the US, the picture was similarly resilient. Initial jobless claims for the week ending 18 July came in at 187K — well below the 210K survey and the prior 209K — a signal that, whatever the June payrolls miss suggested, the US labour market has not materially deteriorated. The July PMI composite surged to 53.6, and services PMI also hit 53.6 — both meaningfully above expectations. New home sales of 628K in June beat the 607K survey. Taken together, the US data told a story of an economy that has not broken — and may in fact be re-accelerating. The implication of all of this — stronger-than-expected activity data across both Australia and the United States — is that the "higher for longer" narrative that had faded briefly after the weak June US payrolls result has returned with considerable force. This directly drove the sharp repricing in government bond markets that was the week's other defining feature Equity Markets A tale of two markets: Europe rallies while Anglo-American tech retreats The week's equity market performance reinforced a pattern that has been building throughout 2026: a growing divergence between markets with high technology sector weightings and those without. The NASDAQ fell 3.32%, dragging the S&P 500 down 0.61%, while the DOW's modest 0.38% decline reflected its lower exposure to the high-multiple growth names most sensitive to rising bond yields. Meanwhile the FTSE gained 1.28%, the STOXX 600 rose 0.46%, and the Hang Seng recovered 1.63% — the latter continuing its partial bounce from June's severe selloff. The mechanism connecting this week's data to equity performance is the bond market. When employment data and PMI readings surprise strongly to the upside — as they did in both Australia and the US this week — government bond yields rise as investors price out rate cuts and price in a more extended period of restrictive monetary policy. Higher bond yields increase the discount rate applied to future corporate earnings, and the mathematics of this disproportionately penalises companies whose valuations rest on earnings many years into the future. Technology stocks — which dominate the NASDAQ and carry the highest price-to-earnings multiples in the market — are therefore the first to reprice when yields rise. For the ASX 200, the 0.28% decline was relatively contained given the scale of the bond market move. Australia's index composition — heavily weighted toward financials, resources and real assets — provides a degree of natural insulation from rising rates relative to a pure technology-heavy index. Indeed, the strong employment data is, at one level, positive for the financials’ sector: more employed Australians means stronger consumer spending, lower mortgage arrears, and continued demand for credit. The complication is that higher bond yields also increase banks' funding costs and add pressure to fixed rate lending margins — a more nuanced picture than a simple positive or negative. Internationally, Europe's outperformance this week is consistent with its structural composition advantage in this environment. The FTSE and STOXX are tilted toward industrials, energy, financials and consumer staples — sectors that generate predictable near-term cash flows and are therefore less sensitive to changes in the long-run discount rate. The valuation question that last week sharpens is whether US and Australian equities are priced appropriately for an environment where bond yields are not only elevated but still rising. With Australian 10-year yields now at 5.09% and US 10-year Treasuries at 4.68%, the yield premium that equities offer over risk-free bonds — the equity risk premium — is compressing further into negative territory. Historically, periods of equity risk premium compression tend to resolve either through bond yields falling (the soft-landing scenario) or equity prices falling (the correction scenario). Neither can be dismissed. Fixed Income & Credit Australian yields surge: the 5% threshold breached and what it means Significant development: The Australian 10-year government bond yield crossed 5.09% this week — breaching the 5.0% level for the first time in this cycle. Combined with the 3-year yield rising to 4.72% and BBSW ticking up to 4.54%, this represents a material repricing of the Australian rate outlook. Investors in fixed income and credit need to understand both the risk and the opportunity this creates. The bond market was the week's most consequential arena for Australian investors, and the total return data makes the story vivid. The Australian fixed rate credit index fell 0.62% over the week — a meaningful capital loss driven entirely by the rise in government bond yields to which fixed rate instruments are directly exposed. By contrast, the Australian floating rate note (FRN) index returned a positive 0.08% — a modest gain, but one that represents an approximately 70 bp performance differential relative to fixed rate credit in a single week. This divergence is not coincidental. It is the precise expression of the interest rate risk advantage that floating rate instruments carry in a rising rate environment. The breach of the 5.0% threshold on Australian 10-year government bonds deserves its own paragraph. While market levels are not magic numbers, the 5.0% level has psychological and institutional significance — many mandates, models, and portfolio construction frameworks are calibrated around this threshold. Further, over the past ten-years, the yield here has been greater than 5.0% less than 1% of the time. Its breach may trigger reassessment of target allocations among institutional investors, and there is a reasonable probability that we see some demand emerge at these levels from long-duration buyers such as superannuation funds and insurance companies. Whether that demand is sufficient to cap yields in the near term is uncertain, but the observation is relevant context. In Australian credit spreads, the moves were modest relative to the yield shift. FRN spreads widened a relatively contained 0.7 bps to 59.0 bps, and fixed rate credit spreads widened just 0.2 bps to 77.1 bps. This is important: spread stability in the face of a material yield rise tells us that the credit market does not perceive an increase in default risk or issuer stress from the current environment. The yield-driven capital loss on fixed rate credit this week was a rate-duration story, not a credit quality story — a meaningful distinction for investors assessing their portfolios. For RMBS and securitised credit, this week's employment data is positive for collateral quality. A June employment gain of 76K — with 29K full-time positions and a participation rate at record highs — means Australian borrowers are better employed and better positioned to service their mortgages than they were a month ago. The credit risk embedded in residential mortgage portfolios continues to look well-contained, even as the interest rate environment complicates the return picture on the rate-sensitive instruments used to fund those portfolios. US Treasuries also sold off, with 2-year yields rising 15 bps to 4.33% and 10-year yields up 13 bps to 4.68%. The strong US PMI and jobless claims data provided the impetus — mirror-imaging the Australian dynamic, where strong activity data pushes rate cut expectations further out and drives yields higher. The global correlation in rate moves this week is a reminder that Australian bond yields do not operate in isolation: they are anchored to US Treasuries through trade, capital flows and investor behaviour, which means the global "higher for longer" narrative has domestic yield implications regardless of what the RBA itself decides. Outlook Strong data, rising yields, and oil above $96: three forces reshaping the second half Last week's data has materially shifted the probability distribution for Australian monetary policy. Prior to the June employment report, the consensus view was that the RBA would hold rates unchanged through 2026 and potentially begin easing in early 2027. The stronger employment gain and the record participation rate makes that timeline look optimistic. A central bank targeting 2–3% inflation cannot comfortably begin cutting rates when employment growth is running at more than five times the rate needed for labour market stability, and when business activity surveys are accelerating rather than moderating. The more honest framing, post this week, is that the next RBA move could plausibly be a hike rather than a cut — though this remains a tail scenario, not a base case. The oil price surge complicates matters further. If oil continues rising — driven by Hormuz disruption, OPEC+ supply discipline, or demand resilience — the direct inflationary impulse would be significant. Combined with a tight labour market driving wage growth, Australia could find itself in an environment where the RBA is considering tightening rather than easing. This is not a prediction — the ceasefire situation is fluid and oil can reverse quickly — but it is a scenario that portfolios should be positioned to withstand. For the US, the week reinforced that the Federal Reserve faces a similar challenge. The combination of strong PMI readings, resilient jobless claims, and a housing market that is recovering argues against imminent rate cuts. The earlier June payrolls miss now looks increasingly like a one-month anomaly rather than a structural turning point. Markets that were pricing two to three Fed cuts by end of 2026 will need to revise those expectations, and that repricing is already partially visible in this week's yield moves. The key questions for the period ahead are: Does the Australian employment strength persist through July and August data, or does it prove to be a volatile one-month reading? Does the oil price stabilise near $96 or continue toward $100 and beyond? And does the US economy's re-acceleration translate into renewed inflation pressure that forces central banks to abandon any remaining easing bias? Each of these questions carries significant implications for both government bond yields and equity valuations, and the answers will substantially determine portfolio returns over the balance of 2026. Of interest this week, we have domestic CPI and PPI figures, with consensus forecasting a modest uptick in trimmed mean figures, both QoQ and YoY.

“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.