How Kapstream Is Balancing Global Shocks and Fixed Income Yields
The following was published by Livewire, 1st July 2026. | Author: Keith Ford
As inflation ripples through the global economy due to the Strait of Hormuz closure, fixed income investors are at a crossroads.
Among the range of impacts stemming from the war in Iran and the subsequent closure of the Strait of Hormuz, the effect on the bond market probably wasn’t at the top of many people’s lists.
The same can likely be said for AI, with most of the attention heading to equities within the supply chain.
However, Dylan Bourke, Managing Director and Portfolio Manager at Kapstream Capital, says there is a “great debate” happening in the fixed income world around the trade off between the AI capital boom and the Strait of Hormuz being shut.
“That supply shock, which has hit oil, gas, fertilisers and helium, which are important for semiconductors, is putting inflationary pressure through the whole global system and that's dragging down growth outside of the US,” Bourke says.
“So, the key question that we're facing here is: is the boom in AI sufficient to offset the drag down of the rest of the world from this supply shock in the Strait of Hormuz?”
In this edition of Fund in Focus, I spoke with Bourke about the Kapstream Absolute Return Income Fund and how it, and fixed income markets, are responding to these global shocks and why the fund takes an unconstrained approach.
Boom v blockade
According to Bourke, the debate over whether the AI boom will win out over the strain that the US-Iran conflict is causing largely comes down to just how long the Strait of Hormuz stays shut.
“Is there sufficient drag on sentiment and is the inflation shock prolonged enough to cause further hikes in rates, which would put a further downward draught on sentiment for risk assets like equities, but also a downward draught on things like credit, which are also risk assets,” he says.
“Equally, you've seen rates sell off in response to this because of the inflationary shock.”
The Absolute Return Income Fund itself has “been fairly defensive”, with short-dated exposure to interest rates and keeping it small, with many bond indexes suffering from the sell off.
“Right now we're siding with the AI boom,” Bourke says.
“We think that the boom is currently stronger than the Strait being shut, but we keep our eyes on it constantly and we would certainly wrestle with whether the demand destruction will overwhelm it in the long run.”
The value of short-term thinking
The Absolute Return Income Fund, which is also available in an ETF wrapper (CBOE: XKAP), targets cash flows of 2 to 3% and offers daily liquidity. A key differentiator for the fund, Bourke notes, is its defensive positioning.
“We deliver quarterly income with pretty limited interest rate sensitivity and credit sensitivity,” he says.
“The market risk that blows around tends to not offset the income that investors receive through our funds.”*
Bourke argues that in the current environment, an absolute return strategy is essential. Unlike traditional fixed interest funds that are bound to rigid benchmarks, an absolute return approach provides the flexibility to target the best return per unit of risk.
“We’re very free to get the best return per unit of risk. Absolute return doesn't have to be long interest rate sensitivity during periods where inflation’s high like right now and that obviously causes people to suffer when they have long-dated fixed income,” he says.
“We are free to move around so when interest rates are likely to increase, inflation’s high, we can reduce our sensitivity to that, but equally we can increase it if the demand destruction does end up overwhelming it and capture some of that downdraft if that was to happen.”
Another benefit to an absolute return fund for the investor is that it’s focused on the outcome.
“Investors who want a liquid investment that earns higher than a cash return target** know what they're getting. Whereas the issue with broader fixed income is it just depends on what the market does.”
Avoiding inefficient benchmarks
Bourke highlights that the Absolute Return Income Fund is unconstrained in large part due to how poorly constructed benchmarks often are because they prioritise the largest borrowers - governments - which typically pay lower returns because they don't offer a credit spread for default risk.
"The problem with fixed income benchmarks is they're very inefficient and they don't have a good outcome focus for investors," Bourke notes.
“If you want interest rate exposure, there are more efficient ways of getting that through futures where you don't have to put up cash against it. You can invest in credit, get the credit spread, but you can also get the benefit of interest rate movements through using futures.”
Benchmarks are also inefficient, he adds, because they create competition between investors and there are a lot of investors who can only buy benchmark investments.
“If you can buy off benchmark investments, there's less competition therefore the investor gets a better return per unit risk potentially,” Bourke says.
“So we prefer to be focused on the return outcomes, focused on the risk outcomes, the 1.5% per annum volatility target for our income fund and focused on providing that daily liquidity, rather than the vagaries of what we consider to be generally a poorly constructed index.”
The portfolio itself reflects this strategy, boasting a broad diversification with over 80 issuers and an average A-minus investment grade rating.
The fund targets a 5.9% yield to maturity, achieved by minimising bond price movements through short-dated exposure. With interest rate sensitivity of approximately 0.7 years - far lower than the 5+ years typical of many indices - the fund is designed to minimise background noise and aims to provide a steadier path through changing market conditions.
Understanding the risks
Looking ahead, while Bourke emphasises that bonds are not "risk-free", he believes the current environment offers support for income investors.
“Obviously global macro conditions matter for any products that are fixed income related, including ours,” he says.
However, this is very different from the post-COVID 2022 rate hiking period, which he calls the “worst environment for fixed income” thanks to government stimulus packages and the continuing supply shock of closed borders.
“Right now we have a supply shock, which is the Strait of Hormuz being shut, but we don't have that same level of additional stimulus that was given on the demand side,” Bourke explains.
“This market environment’s very different. With a yield of 5.9% we think that you've got a lot of buffer compared to that previous scenario. But if I was an investor for all asset classes, I'd be watching the Strait of Hormuz very carefully because you still have a supply shock and if you saw the governments respond in the same way as in 2022 with a big government additional stimulus, that would be panic bells across every asset class.
“We don't envisage that, but it could be a rough time for more volatile asset classes out there than short-dated fixed income in this environment.”
Avoiding the volatility
For investors, the Kapstream Absolute Return Income Fund often serves two primary purposes: acting as a defensive, low-volatility "liquidity bucket", or functioning as a defensive fixed income anchor where investors seek reliable income with minimal sensitivity to macro rate swings.
*Investments in the Fund is subject to investment risk, including possible delays in repayment and loss of income or principal invested.
**Neither any particular rate of return nor capital invested are guaranteed.
This is general information only and does not take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Product Disclosure Statement (PDS) and target market determination (TMD) on our website. Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 is the responsible entity and issuer of interests in the Kapstream Absolute Return Income Fund and the Kapstream Absolute Return Income Active ETF. Other than information which is identified as sourced from Fidante in relation to the Fund(s), Fidante is not responsible for the information in this material, including any statements of opinion.