Strategy commentary cont'd: December 2025 was the fourth-warmest December on record, following 2023, 2024, and 2015. The average global sea surface temperature reached 20.57°C for the month, 0.53°C above the 1982–2010 December average. 2025 finished as the third hottest year on record behind 2023 and 2024.

Source: Climate Reanalyzer. Daily Sea Surface Temperature. Climate Change Institute, University of Maine. Retrieved 6-Jan, 2025, from https://climatereanalyzer.org/

December 2025 was marked by intense rainfall and flooding linked to atmospheric rivers in parts of the Pacific Northwest, alongside powerful winter storm systems across North America that brought disruptive winds, snow and sharp temperature fluctuations. At the same time, tropical cyclone activity affected regions of Australia, driven by unusually warm sea-surface temperatures, while anomalous warmth and dryness were observed in parts of South Asia.

The most notable event of the month was a powerful atmospheric river that soaked Washington State and British Columbia, with persistent rainfall pushing major rivers toward flood stage. Further south along the US West Coast, heavy subtropical rainfall delivered up to 4 inches of precipitation across San Diego and surrounding areas. Such atmospheric river events are increasingly associated with warmer air holding more moisture, a well-established outcome of anthropogenic warming. Further east, Illinois experienced a rare late-December severe weather outbreak, as unseasonably warm and humid air clashed with advancing cold fronts, spawning at least 16 tornadoes.

In Australia, Tropical Cyclone Hayley developed in the southern Indian Ocean and made landfall as a category 3 system on the north-west coast of Western Australia. The cyclone brought strong winds and heavy rainfall, causing infrastructure damage and prompting flash flooding warnings.

In Europe, while December did not feature a single continent-wide headline event, significant rainfall and flooding affected southern Spain, particularly along the Costa del Sol and around Malaga. There, intense downpours inundated streets, forced evacuations, and caused infrastructure damage in the days leading up to the new year.

Strategy commentary cont'd: Coolabah Commentary

In the month of December, there was a secular shift in interest rate expectations marked by a bull steepening in many global yield curves, whereby short-term interest rates declined while long-term rates climbed. This reflected several cross-currents, including the US Federal Reserve continuing to ease its policy rate lower, combined with investor anxiety about deteriorating budget deficits, ever-growing government bond issuance, and the specter of inflation rates not mean-reverting sustainably to central bank targets, amongst other things.

Coolabah’s main macro ideas for 2026 are best summarized as follows:

• We believe in US economic and strategic exceptionalism and that the short- and medium-term efficacy of President Donald Trump’s fiscal, trade, and geopolitical policies have been consistently underestimated by markets;
• We believe that the US economy will surprise with its strength in the years ahead, underpinned by the AI capex boom, reshoring of supply chains, a manufacturing renaissance, aggressive deregulation, reinvigorated entrepreneurial activity, political policy clarity, and renewed public support for business-friendly outcomes given the success of Texas and Florida juxtaposed against California and New York;
• We believe that the political zeitgeist globally remains focused on public spending in the name of winning short-term votes irrespective of the enduring fiscal consequences, which creates material inflation and interest rate risks in the period ahead;
• We believe that the AI revolution is more likely to be inflationary rather than disinflationary in the near-term as a consequence of resource bottlenecks, understated capex spending competition, and the likelihood that AI will generate positive rather than negative net employment demand over the next 1-2 years;
• We believe that the monetary policy easing cycle has run its course and that the risk of interest rate increases in 2026 and 2027 has been underestimated by markets, although a recent reassessment has taken place;
• We believe that government bond term premia and the long-term cost of capital are likely to remain elevated and could drift materially higher in an environment where the US economy expands at a faster-than-expected pace (and other nation-states eventually seek to emulate its policy posture);
• We believe that the probability of stronger-than-anticipated economic outcomes is likely ahead of the midterm elections in the US;
• We believe that risk premia have shifted from corporate to public sector balance sheets, which is why credit spreads have compressed while term premia and long-term risk-free rates have increased;
• We reckon the US de-dollarization dynamic is a short-term phenomenon and re-dollarization will eventually become a new normal once Trump’s policies are better understood;
• We believe that the geopolitical environment is being overhauled by the "America First" mantra, which is predicated on a realpolitik logic that prizes unilateral actions to protect American (and capitalist) interests ahead of failed Western liberal-democratic virtue signalling that hoped to incentivize responsible behaviors from non-democratic actors, which has never played out in practice; and
• We believe that there are many latent inefficiencies in global bond markets that Coolabah is uniquely positioned to capitalize on.

In 2025, Coolabah traded AUD$129bn of bonds and CDS (USD$82bn). This was split by approximately A$71bn of credit trades combined with A$57bn of government and sub-sovereign trades.

Strategy commentary cont'd: In December, 10-year government bond yields rose around the world, led by Japan (+26bps), Australia (+23bps), Germany (+17bps), New Zealand (+15bps), France (+16bps), Italy (+15bps), and the US (+15bps). There were more modest moves in the UK, where 10-year gilt yields appreciated only 4bps.

A seasonal dip in new financial and corporate bond issuance, coupled with higher risk-free rates, helped physical and synthetic credit spreads perform in December. In derivative markets, the benchmark US and European investment-grade credit default swap indices, known as CDX IG and Main, compressed by 1.1bps and 2.1bps, respectively. This was echoed by the US and European high-yield indices, denoted by CDX HY and Xover, which also moved 6bps and 11bps tighter in the month.

In physical (or cash) bonds, investment-grade credit spreads across the US, UK, and European markets similarly drifted 3bps tighter in December. French and Italian government bond spreads to Bunds, which are another risk proxy, also contracted by about 1bp over the month.

In the Antipodes, spread moves were mixed: whereas benchmark 5-year Aussie major bank senior bond spreads climbed 2bps in December, subordinated major bank bond spreads declined 2bps. In the retail-centric ASX-listed hybrid market, 5-year major bank hybrid spreads plunged from 207bps to 171bps over the quarterly bank bill swap rate, albeit on diminishing turnover. This was a seasonally predictable dynamic amplified by scarcity into year-end as bank-issued hybrids are phased out by the regulator.

December USD IG issuance slowed sharply from November to US$38bn (YTD US$1.69trn), with muted supply across both financials and corporates. Coolabah selectively participated in attractively priced transactions, notably ANZ’s 3-year FRN.

In EUR investment-grade credit, supply rebounded to €17.5bn (approximately €9.5bn financials), compared with no issuance in December 2024. Despite seasonally light conditions, demand remained healthy, with deals averaging a 2.6x subscription rate. The standout transaction was Goldman Sachs’ dual-tranche HoldCo deal, which was well received following a long absence from the EUR market, complemented by solid demand for issues from BFCM and Deutsche Bank.

The rates sell-off hurt the performance of long-duration, or fixed-rate, bond indices. In USD, the Bloomberg Global Aggregate Corporate Index lost 0.10% in December as higher yields taxed fixed-rate bond prices. In contrast, the interest rate-hedged version of this index performed robustly, gaining 0.64%.

Given the relatively aggressive rise in Aussie government bond yields, the AusBond Composite Bond Index underperformed its Global Aggregate equivalent, losing 0.63% in December. The duration-hedged AusBond Floating-Rate Note Index performed better, offering a 0.37% return in the month.

Other risk markets were mixed. In the US, equities struggled to generate positive total returns: the S&P 500 was unchanged (0.06%) while the Nasdaq lost 0.67%. Japanese equities also lost ground, with the Nikkei 225 falling 0.37%. Other equity markets fared better, led by the UK (FTSE 100 up 2.26%), Europe (Euro Stoxx 50 up 2.25%), Australia (ASX 200 up 1.30%), and New Zealand (NZX 50 up 0.44%).

Brent Crude oil prices declined 3.72% in December, which is one disinflationary force in the global economy that could be accentuated by Trumpian interventions in Venezuela. That ultimate inflation hedge, gold, continued its record ascent, rising 1.89% over the month. Bitcoin’s slump persisted, dropping 3.59% to USD 87,648.

In 2025, there were several big market thematics, including the advent of the trade war, the AI revolution and related hyperscaler capex boom, the emergence of further Fed cuts, and then burgeoning investor insouciance with President Donald Trump’s otherwise radical economic and geopolitical ideas.

The trade-weighted US dollar depreciated by 7-8% as a result of de-dollarization diversification and the impact of the Fed’s cuts, although the damage was done in the first half of the year (in the second half, the trade-weighted USD index tracked sideways).

Strategy commentary cont'd: In bond markets, one of the best-performing assets in 2025 was global duration. The 5.9-year duration Bloomberg Global Aggregate Corporate Index returned between 6.62% (AUD) and 7.08% (USD). This exceeded the cash rate in AUD (3.88%) and USD (4.24%), and the duration-hedged version of the Global Aggregate Corporate benchmark, which returned between 5.47% (AUD) and 5.89% (USD).

In the Aussie market, both long-duration and floating-rate indices delivered inferior outcomes to their global counterparts: the 4.8-year duration AusBond Composite Bond Index returned only 3.17%, while the AusBond FRN Index rose 4.97%.

Coolabah’s best-performing strategies in 2025 were our long-duration funds benchmarked against the Bloomberg Global Aggregate Corporate Index. After fees, the Pacific Coolabah Global Active Credit Fund returned 7.82% in USD compared to the index’s 7.08%. The AUD version of this strategy, called the Coolabah Active Global Bond Fund, returned 7.29% net compared to the AUD index’s 6.62%.

Not far behind was Coolabah’s A+ rated, daily liquidity, and floating-rate Long Short Opportunities Fund, which returned 7.08% after fees. Similar strategies, like the Long Short Credit Fund and the Floating-Rate High Yield Fund, offered comparable outcomes. Please note that past performance is no guide to future returns and investors should read the fund's PDS to better understand its risks.

Strategy commentary cont'd: