Strategy commentary cont'd:

• 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.

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, multiple tranches of Merck’s US$7.25bn multi-tranche deal, and S&P Global’s 5-year tranche. These transactions saw strong demand (approximately 5-7x covered) and post-pricing spread tightening.

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%.

Strategy commentary cont'd: 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).

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 7.28% 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: