SARIF Commentary: July

Key arguments

• Renewed geopolitical risk in the Gulf has pushed inflation and growth in opposite directions, leaving central banks with a difficult trade-off.
• Front-end bond valuations look appealing, but higher energy prices remain the key risk.
• The RBA is likely done for 2026, with trimmed mean inflation below expectations.
• European Central Bank may be pricing too much tightening; growth is slowing.
• US Fed may avoid tightening in 2026 if oil remains below $100, with inflation excluding energy improving.
• Credit exposure reduced on asymmetric spread risk, with cuts in EM debt and AUD CDX.
• Short AUD position maintained as a hedge against further escalation and oil shocks.

Corresponding source evidence

1. Front-end bond valuations look appealing, but higher energy prices remain the key risk. · medium-term
2. We cut emerging market debt exposure from 6% to 2.5% to reduce exposure to oil-sensitive correlated risks, closed the 5% AUD CDX sold protection position near this year’s tightest levels and cut the small position in US hybrids. · short-term
3. We also increased the AUD subordinated bank exposure from 10% to 15% (replacing the sold AUD credit protection). With call dates under three years and spreads above 125bps over the RBA cash rate, these Australian bank securities offer very attractive compensation for low spread-duration risk, provided they are called within three years as expected. · medium-term