Strategy commentary cont'd: In Australia, there was more striking spread compression further down the capital structure: whereas 5-year major bank senior bond spreads contracted 3bps in the month, Tier 2 subordinated bonds (-7bps) and AT1 hybrids (-14bps) outperformed. This is likely being driven by a search for all-in yield as cash rates have declined.

Equity markets mostly rallied firmly in September, led by the Nasdaq (5.4%), the S&P 500 (3.5%), the Eurostoxx 50 (3.3%), the NZX 50 (2.8%), and the FTSE 100 (1.8%). As future RBA rate cuts were called into question, the ASX 200 fell 0.8%.

While oil prices slipped further (Brent down 1.6%), gold continued its march toward US$4,000 (US$3,859). Bitcoin also rose 6.4% to US$114,641, although it remains below recent peaks.

September saw $216 billion in USD investment-grade credit issuance, marking the fifth-highest month ever by volume and the largest by number of tranches. The financial sector accounted for nearly 44% of the supply, bringing total YTD issuance to $1.35 trillion according to Bank of America. Significant deals included Commonwealth Bank of Australia's 5-year bond, which priced at the tightest-ever spread for a 5-year USD senior bond issued by an Australian bank in USD according to Citi. Oracle's $18 billion multi-tranche issuance was a major market event, with high demand and bonds rallying post-issuance.

The Euro market saw €83 billion in IG issuance, with 37% from financials, including strong demand for bonds from banks like Nordea and Belfius. Notably, ABN Amro continued their successful issuance programme under the new harmonised EU Green Bond framework. European SSA issuance included an inaugural deal from the Australian State of Victoria, which drew €17 billion in demand for a €2 billion deal, and a €5 billion climate bond from the European Investment Bank, both performing well post-issuance. Other significant deals came from the European Union, Italy, and Portugal.

Since mid-April 2025, Coolabah has been actively positioned to capitalise on a relatively stable economic and geopolitical regime characterised by robust performance across equity and bond markets.

In September, Coolabah's strategies consequently outperformed major indices, led by the A-rated, daily liquidity, 5.9-year-duration Pacific Coolabah Global Active Credit UCITS Fund, which returned 1.41% net of fees compared to the Bloomberg Global Aggregate Corporate Index's 1.17%. Over the past 12 months, this strategy has beaten the index by 1.21% after all fees. The Australian version of this solution, the Coolabah Active Global Bond Fund, returned 1.29% after fees.

The recently launched A-rated, daily liquidity Pacific Coolabah Credit Alpha UCITS Fund, which is hedged to zero duration, also delivered strong returns in September, climbing 0.87% after all fees.

In Australia, the A+ rated, daily liquid, zero-duration Long Short Opportunities Fund returned 0.81% net, similar to the performance of Coolabah's other A+ rated, daily liquid, zero-duration strategies, including the Global Floating-Rate High Yield Fund or YLDX (0.79% net), the Floating-Rate High Yield Fund (0.77%-0.79% net), and the Long Short Credit Fund (0.69% net).

Over the past year, the Long Short Opportunities Fund has returned 8.6% net, closely followed by the Long Short Credit Fund (7.8%-8.1% net) and the Floating-Rate High Yield Fund (7.5%-7.7% net).

While yields have declined somewhat, they remain high by recent historical standards and well above the RBA's 3.6% cash rate. Although credit spreads have tightened sharply, this dynamic needs to be juxtaposed against a widening of term premia for sovereigns.

In the post-2008 period, term premia—measuring the difference between short- and long-term risk-free government bond yields—were often non-existent or negative. Today, they are demonstrably positive in many markets as investors fret about a tsunami of public debt issuance.

By contrast, many corporate balance sheets have strengthened as firms have built up cash and de-levered. There has, in effect, been a risk transfer in credit spread terms from corporate to public balance sheets following the pandemic. Rising term premia therefore need to be weighed against tighter corporate credit spreads.

Strategy commentary cont'd:

Note that past performance is no guide to future returns and investors should read the product PDS to better understand risks and consult an independent adviser.

Initial tariff impacts on world trade/inflation

The US government is still introducing new tariffs, but the highest effective US tariff rates in decades has fallen short of announced tariff rates to date because of:

1. Government exemptions and corporate deals;
2. US firms substituting away from high-priced goods to cheaper alternatives; and
3. China likely rerouting some sales to the US through lower-tariff Asian countries, even though rerouting is meant to attract a 40% penalty tariff.

US tariffs have slowed world trade and dramatically changed trade flows, but the saving grace has been the lack of retaliation by other countries. The profound shift in US trade policy should unwind globalisation, leading to less efficient production and higher costs, where Brexit suggests the structural shift will take several years.

There is no clear sign of a disinflationary impulse from US tariffs to the rest of the world via weaker world growth and/or China dumping goods meant for the US market. World export prices have risen and Chinese export prices are little changed, although a weaker USD has made China more competitive.

Strategy commentary cont'd: Goods prices are actually rising at the retail level in many countries, partly because of recent rises in import prices. There are no broad-based supply disruptions, but some multinationals could be evening out the cost of US tariffs by globally raising prices.

Strategy commentary cont'd: High AUS Q3 underlying inflation - RBA on hold into next year

Trimmed mean inflation looks like it will print well above the RBA's forecast for Q3, such that a rate cut this year looks unlikely barring a sudden rise in unemployment and/or a significant left-field shock from overseas.

The RBA is forecasting a 0.6% increase in the trimmed mean CPI in Q3, where Governor Bullock recently said that the RBA could still cut in November if inflation printed at either 0.7% or 0.8%, depending on the detail of the CPI and assuming that the staff still forecast inflation would return to the 2.5% target.

Coolabah expects a high 1.0% increase in the trimmed mean CPI for Q3. The 1.0% estimate is still a forecast given that the CPI components for the final month of the quarter are estimated and since the monthly CPI indicator is an incomplete version of the quarter CPI, If correct, a 1.0% increase for the trimmed mean CPI would follow a 0.7% increase in Q1 and a rise of 0.6% in Q2 and would be the largest increase since the start of 2024.

Such an outcome would put the RBA on hold into next year until it could judge whether higher inflation in Q3 was temporary, where the ABS will soon start publishing the full monthly CPI - which is closely aligned to the quarterly release according to the ABS - with October data, together with a short history, due in November.

Unless it proves temporary, a high outcome for Q3 could also cause the RBA to question its optimistic views on both a lower neutral policy rate and a lower NAIRU.

Small fall in ADP payrolls in Sep

The White House has shut down the government in a dispute over the budget and if the shutdown persists, the official payrolls report will not be released because it does not fall into the category of an essential government service.

Payrolls have broadly stalled over recent months and the private-sector ADP employment report showed a marginal decline of less than 0.1% in September after a downwardly-revised flat outcome in August.

Much of this weakness was due to the benchmarking of the ADP employment report to the official QCEW payrolls survey, which is practically a census of all American firms.

ADP noted that this benchmarking was less precise than usual because "[the latest] QCEW [survey] contained a higher-than-normal number of missing or redacted values for establishment size by [industry] sector and geography subgroups".

On economic statistics, the Bureau of Economic Analysis - which publishes the core PCE deflator and GDP as part of the national accounts - continues to add to the list of economic indicators that it no longer publishes or has suspended because of budget cuts. This echoes the more severe cutbacks in key environmental and health data by other US government agencies.

On the Fed, the Supreme Court was due to decide whether Fed Governor Cook could be stood down until a ruling is made on whether President Trump can fire her. The court has said that it will now decide on her future in January, which means she will continue to work at the Fed until then.

A January decision would precede the Board of Governors vote on recertifying the regional Fed presidents in February, where the White House plans to block at some of them from sitting on the FOMC. The legislation is not clear whether a regional Fed president can be blocked by just one governor or if it needs to be a majority decision.

Also on the Supreme Court, it will decide on the government appeal against the (Federal) Court of International Trade ruling that most of the new tariffs were illegal - ie, they had no grounding in matters of national security - in November. If the tariffs are struck down, it is not clear whether the government has properly-legislated tariffs waiting in the wings.

Strategy commentary cont'd:

EA inflation in line with ECB forecasts in Sep

Euro area core inflation tracked in line with the ECB's forecast in September, suggesting the ECB can continue to sit tight on rates, although with tentative signs of a deterioration.

Annual core inflation was 2.3% in Q3, down from 2.4% in Q2 and in line with the ECB's latest quarterly forecast.

The ECB is forecasting a further gradual improvement in inflation into next year, although the monthly profile of the data tentatively suggests that there is some risk that the improvement takes longer.

That is, on our seasonal adjustment, the core CPI rose by 0.2% in September for the fourth month in a row, but the trend annualised monthly inflation rate has edged up from a recent low of 2.25% to 2.5%, above the annual inflation rate of 2.3%, where the latter almost rounded up to 2.4%.

Core goods prices continue to rise, up 0.9% for the ninth month in a row, with trend annualised monthly inflation running at just over 1%, above the annual inflation rate of 0.8%. By way of comparison, annual inflation was running at about 0.5% prior to COVID. Core goods inflation is rising in the larger advanced economies, increasing strongly in Japan and picking up in the US, euro area and the UK.

Services prices rose by another 0.3% in the month, with trend annualised monthly inflation steady at 3.25%. Annual inflation was again steady at 3.2%, above its pre-COVID rate of around 1.75%. Services inflation has improved in most countries, but is still above pre-pandemic levels.

Strategy commentary cont'd: