Advisors should focus on positioning portfolios to earn carry efficiently while retaining flexibility if conditions shift.
Markets are fixated on two questions: how far rates rise and when cuts begin. But that obsession risks missing the bigger shift underway in credit markets, according to Daintree Capital.
At a briefing to investors and advisers in Sydney this week, Justin Tyler from Daintree Capital said the focus on local cash rates is too narrow.
“For credit investors, the rate debate is a distraction,” Tyler said. “The real issue is whether portfolios are positioned for a structurally different US rate regime.”
Tyler pointed to a growing divergence in the United States between business investment — heavily influenced by AI-related capex — and jobs growth, a pattern historically associated with recessions.
“The bullish case is that productivity gains make this cycle different,” he said. “The bearish case is that front-loaded investment fades and labour markets weaken.”
US monetary policy, he argued, is now effectively binary on employment outcomes.
“If labour markets deteriorate meaningfully, the Fed will move quickly. That risk remains live.”
Australia closer to peak?
Domestically, Tyler said the RBA’s hawkish tone reflects credibility concerns after inflation spent years outside the 2–3 per cent band. But the underlying inflation trend is less concerning than headline numbers suggest.
“Strip out administered prices and market-sector inflation is much closer to target,” he said.
At the same time, fiscal transfers that supported household incomes have rolled off sharply, and wage growth has been running ahead of corporate sales — a dynamic he said is unlikely to persist.
“The labour market is resilient, but vacancies have room to fall. As they do, markets will become less sanguine.”
Taken together, Tyler said the case for materially more restrictive policy is weak.
“The hiking cycle may be closer to its effective peak than markets assume.”
Short end preferred, long end vulnerable
Daintree has modestly extended duration — but only in the shorter end of the Australian curve.
“The three-year sector offers attractive carry without embedding the structural risks we see further out.”
Tyler was more cautious on long-dated bonds, citing persistent fiscal deficits, quantitative tightening and elevated inflation uncertainty.
“Term premia remain below historical averages. If inflation volatility proves structurally higher, long-dated yields may need to adjust further.
“In that context, longer tenor exposure is not compelling.”
Tight spreads not a reason to chase risk
Credit spreads are around 40 basis points below long-term averages, reflecting strong liquidity and investor demand. Tyler rejected the idea that tight spreads alone justify either de-risking or stretching for yield.
“Spreads are tight because fundamentals are stable,” he said. “In short-dated, high-quality credit, default risk remains low outside systemic shocks.”
More importantly, total return in short-duration credit is now driven primarily by elevated base cash rates rather than further spread compression.
“The bigger risk isn’t tight spreads — it’s abandoning underwriting discipline to chase incremental yield.”
For advisers, Tyler said the focus should shift away from forecasting the first rate cut and towards positioning portfolios to earn carry efficiently while retaining flexibility if conditions shift.
“In this cycle, disciplined short-duration credit remains a pragmatic allocation — provided discipline isn’t sacrificed in pursuit of yield.”
