Strategy commentary cont'd: In Australia, A$24.5bn of investment-grade credit was issued during the month, this was heavily skewed towards financials, making up 87% of issuance. Within financials issuance, we saw issuers initially favour senior bonds before issuing more subordinated debt. Credit spreads are tight compared with historical ranges, especially in subordinated debt, so as issuance continued, we saw demand fall despite reasonable new-issue concessions.

A$ financial senior deals averaged a 2.8x subscription rate compared to financial subordinated deals which averaged a 2.2x subscription rate. Semis issued around A$12bn of bonds during the month across syndications, tenders, and reverse enquiries. All states issued except for ACT. Syndication accounted for A$8.5bn of bonds, with an average subscription rate of 3.75x, and a significant increase in offshore participation.

In sovereign markets, the month of February was characterised by heightened market uncertainty. Iran has dominated the headlines, with its talks with the US almost a daily focus for markets. New Federal Reserve Chair Kevin Warsh, announced on the last day of January, has also been at the centre of attention, with market participants attempting to discern both the direction and potential impact of his future policy stance.

The general market response has been to buy treasuries — and safe havens more broadly. Gold is once again higher on the month, just off its highs, and the US 2s30s curve is 5bps steeper, reflecting what could be a more dovish Fed at the front end paired with a tighter stance on the Fed balance sheet at the longer end.

Despite these market headwinds, February was still a decent month for issuance, with the main European sovereigns now, on average, around 20% through their annual funding needs, and Tier 1 SSA issuers such as the European Investment Bank having completed around 50% of their global funding programmes for the year.

Avoid cockroaches like the plague in the higher-for-longer world

We have been focused on several core macro theses. The first is that AI could be inflationary, rather than deflationary, given the spending and ensuing bottlenecks it is generating, without yet displacing large swathes of the labour market.

A second idea is that inflation may be stickier than markets expect in light of rampant public spending, low unemployment rates, and, in countries like Australia, New Zealand and the UK, persistently dire productivity.

As our colleague Kieran Davies recently showed, core inflation in most developed nations has been stuck above their central banks' targets. Australia is distinguished by the fact that we are the only country where unemployment is lower than the so-called natural rate that is compatible with stable inflation.

Strategy commentary cont'd: This is attributable to the Reserve Bank of Australia's decision to lavish the local economy with excessively cheap money in the name of driving artificially high employment growth, which was particularly helpful during the federal election last year!

The third is that markets have not been properly pricing in the risks of interest rate increases and/or a hawkish pivot from the US Federal Reserve. In mid-2025, there was a 0% probability imputed to US rate rises over the next three years, which made no sense. The recent oil and gas shocks in the Middle East could substantially raise the chance of a re-rating of future interest rate expectations. In many countries, gas prices have jumped by more than 50%.

A fourth idea has been that the perennially underestimated US President Donald Trump is the most influential actor of the 21st century. Trump is reshaping everything: the penetration of alternative and mainstream media; global trade; the defence and foreign policies of almost all nations; conflicts in Europe and the Middle East; the fate of individual states like Venezuela, Iran, Cuba and Greenland; the calculus of key adversaries, like China and Russia; the tenure and longevity of despots (Maduro and Khamenei); and, of course, his domestic economy, polity and sense of national identity. Nobody really saw this coming back in the Celebrity Apprentice days.

A fifth thought has been that the US economy will be stronger than most people assume as a result of super stimulatory fiscal and monetary policy, re-shoring of strategic supply chains, the AI capex boom (which hyper-scalers are desperately trying to understate), aggressive deregulation, and an ascendent entrepreneurial zeitgeist as the private rather than the public sector is reinstated as the heart and soul of the economy.

A final insight has been that "re-dollarisation" rather than "de-dollarisation" could come back in vogue due to Trump's assertive revival of US exceptionalism and geopolitical primacy. Whether you like it or not, US hegemony is back. Even Trump's regulation of "stablecoins", which now have to be backed by US dollar assets, creates demand for his own exchange rate. The ultimate value of any currency is the guarantee afforded by its government. And there is no stronger backing right now than that offered by the United States of America.

One investment corollary of all of this is that you want to avoid default risk, or Jamie Dimon's so-called "cockroaches", like the plague in a higher-for-longer rate environment. If rates continue to climb, we will see more and more household and corporate stress, which few have prepared properly for.

Another is that you want to be as liquid as possible. In recent times, investors across different asset classes have been repeatedly burnt by illiquidity (or the inability to trade). Many have been locked, or gated, in their funds, unable to withdraw money when everyone rushes for the exit at the same time. We have seen examples of this in real estate and risky debt markets.

The cost of illiquidity has been underestimated by investors duped by the search for yield, especially during the low-rates-for-long climate that prevailed after the global financial crisis. The problem with the absence of liquidity is that it gives you zero freedom to adjust your decisions in times of crisis, or in periods of distorted valuations, when you would normally want to capitalise on such opportunities.

It is little appreciated that we typically start with tremendous illiquidity in our lives: your house is illiquid; your human capital likewise (it is hard moving jobs); a business owner's equity is difficult to trade; we cannot touch our super savings until we are 65; and then we are often encouraged to load-up on illiquid assets via a portfolio construction process that often ignores these constraints. One should, therefore, consider liquid assets, especially when the expected returns offered by illiquid alternatives are lower than they have been in the past, which is generally true today.

Perhaps the cheapest asset right now is the simplest and safest: cash, which also affords almost infinite liquidity and flexibility. The interest rate available on the Reserve Bank of Australia's cash rate, or bank-issued term deposits, is much higher than it has been, on average, over the past 25 years. The same observation is true of US cash.

Strategy commentary cont'd: Long-term risk-free rates are also attractive by historical standards. The yield on a 10-year, AAA-rated Australian Commonwealth government bond is way above its 25-year average. And for good reason: the budget deficits today are much bigger than they have been in the past.

Fixed-income investors are, therefore, demanding higher interest rates on otherwise riskless debt. They worry about imprudent political spending, inflation and interest rates. They are, as a consequence, requiring more compensation for this uncertainty in the form of higher yields.

The 're-dollarisation' trade is crushing gold and bitcoin

Two of our biggest ideas in 2025 were the notion of US "re-dollarisation" and the prospect of interest rate increases rather than decreases (and a higher long-term cost of capital more generally).

In 2026, we have seen both the re-emergence of tighter monetary policy and early signs of the revival of the US dollar as the dominant global currency. The collapses in the price of both gold and bitcoin are two clear casualties of the re-dollarisation dynamic.

This latter is based on the belief that the US is aggressively re-establishing its hegemonic primacy and driving a resurgence in its competitive economic advantages in innovation, entrepreneurship and production. The AI-induced hyperscaler capex boom is the one example of this. Another is US President Donald Trump's unprecedented projection of American power right around the globe.

The trigger for the plunge in the value of cryptocurrencies and gold, which had been leveraged as an alternative savings solution to the dollar, was (counter-intuitively) Trump announcing his choice for the US Federal Reserve chair to replace incumbent Jerome Powell.

While the mainstream elites would have us believe that Trump was going to select a dovish patsy to slash rates and destroy the Fed's credibility, he opted instead for the long-time inflation hawk Kevin Warsh.

Warsh is a former Morgan Stanley investment banker who served on the Fed board between 2006 and 2011. During this tenure he developed a reputation for being an uber-hawk, opposing quantitative easing and excessively cheap money, and seeking rapid normalisation of near-zero interest rate policies even when the economy seemed weak.

The stunning 75% rise in the value of gold reflected investor concerns about US monetary debasement, Trump's perceived degradation of the Fed's credibility and the risk of higher inflation as a consequence of profligate fiscal policy.

Cryptocurrencies have relentlessly exploited these apprehensions, purporting to be an inflation hedge and superior store of wealth. This fool's gold was given a huge boost by Trump's crypto-boosting policies that were arguably designed to advance his own personal interests.

Yet, in February bitcoin plunged to just US$60,000, some 13% below its closing level on US election day in 2024 and a breathtaking 52% below its record peak around US$126,000. It's been a savage blow for the crypto community.

In fact, bitcoin has been trading below its 2021 highs. If you bought this Ponzi scheme back then, you would have net lost money over the past four years.

We have previously explained that bitcoin has no real intrinsic value other than as an ostensibly stealthy and income-free savings tool for those seeking to squirrel away wealth beyond the reach of governments.

Bitcoin is not a stable store of wealth – it's one of the most capriciously volatile assets that exists. Despite hyperbolic hopes, bitcoin has never been used as a secular medium of exchange or pervasive digital payment mechanism.

Strategy commentary cont'd: Bitcoin is not the inflation hedge that many allege: in fact, it is an amplifier of inflation-related downside risks. In 2022, bitcoin plummeted 78% from its peak as a result of the steep rate hikes that were required to quell the demand-side inflation shock.

Finally, even the most fervent crypto warriors concede that both bitcoin and the blockchain have security vulnerabilities that could expose them to future compromises that would eviscerate their reason for being.

The most compelling use case for this faux digital money is as a possible redoubt for those who live in non-democratic states and are subject to the constant threat of having their wealth appropriated.

This column further contends that interest rate increases that make cash deposits more attractive have the effect of cannibalising the demand for cryptocurrencies that claim to serve as a credible surrogate.

One thing that savers learn during any real crisis is that their cash is not worth anything without an implicit or explicit government guarantee. This is why all bank deposits attract one. And in any stress event, the value of cryptocurrencies has typically been smashed precisely because otherwise sanguine savers suddenly start running for the exits. This is the digital equivalent of a run on bank deposits.

The RBA as an outlier among central banks

The RBA is an outlier among advanced economy central banks, underachieving on inflation and overachieving on employment, with monetary policy that is hardly restrictive. This has been a policy choice made by the RBA as it tested for a lower NAIRU using lower interest rates.

The Middle East conflict could change the outlook dramatically, but assuming inflation remains persistent, scenarios using different assumptions for the NAIRU point to a cash rate of about 4.25-4.75%, which compares with the staff's economic outlook that is based on market pricing that has a cash rate peak of 4.25%.

Financial conditions have loosened considerably over recent years, but have tightened a little lately on the sharp rise in the AUD that reflects expectations of higher interest rates. RBA modelling shows a higher AUD can help contain inflation, although the impact is hard to see in the data.

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