The Income fund fell -0.3% in July, in line with its benchmark which also declined -0.3%.

The month was characterized by significant news across both interest rates and corporate bonds. Locally, the NZ official cash rate was raised by the Reserve Bank to 2.5% from 2.25%, marking the end of this interest rate cycle. The Iranian conflict was cited as a contributor to both short- and medium-term inflation concerns, with subsequent news from the on again, off again ceasefire seemingly justifying this cautious approach.

Elsewhere, the AI buildout saw increasing volatility as memory makers (a key beneficiary) saw their share prices retract heavily, upwards of 50%, after running up several hundred percent year to date. This volatility leaked through to corporate bond prices as investors became more risk averse, seeing greater chances of wasted spending.

This drove the key lowlight for the month Coreweave, where bonds fell by about 6% during the month. As a key provider of AI compute, investors have become more wary about Coreweave's business model, particularly in the funding of expensive AI accelerators (Nvidia GPUs). We firmly believe that while volatility in market prices may continue, the fundamental demand for AI compute capacity is very strong, with recent datapoints from Google and Anthropic strongly positive. We remain constructive.

Positively, there were also contributors from the same AI thematic during the month – bonds issued from datacentre builders NextDC and CDC Datacentres rallied during the month, by 1% each. Both are building large AI datacentres for so-called "Hyperscale" technology companies, some of whom are also Coreweave customers. This suggests that fundamental demand for AI compute financing remains strong, at least within the Australian bond market. As a result, we took the opportunity to lower our exposure to these names, adding to bonds with relatively higher yields.