Focus on resilience

Within fixed income, the focus remains on resilience as we expect elevated market volatility and downside risks, especially if inflationary risks persist and monetary easing is delayed.

Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore

Heading into May, increased US Investment Grade (IG) bond issuance following earnings may widen spreads, while higher oil prices and a more hawkish Federal Reserve add uncertainty and keep stagflation concerns elevated.

We maintain a modest underweight stance on fixed income, focusing on resilience amid expected volatility and downside risks, particularly if inflation persists and policy easing is delayed. High-quality credits remain preferred, with a neutral view on overall portfolio duration.

A weighted average duration of three to seven years provides flexibility across changing conditions. Duration can be extended during macro downturns but should be shortened if inflation pressures remain elevated, unless yield curve steepness offers sufficient compensation.

In Developed Markets (DM), we favour IG over High Yield (HY) given late-cycle dynamics and less attractive valuations. In Emerging Markets (EM), we remain neutral on Asia, supported by stable fundamentals and strong technical factors.

Developed Markets

Heavy bond supply for AI CAPEX and M&A, along with rate volatility, may increase performance dispersion and negatively impact US IG. In a prolonged energy disruption, European spreads are likely to underperform US due to Europe’s reliance on energy imports from the Middle East.

Emerging Market Corporates

EM corporates have outperformed DM peers YTD. Selective exposure to quality EM bonds provides global investors diversification benefits amid long-term US Dollar weakness and worsening fiscal conditions in major developed economies. We will continue monitoring the effects of the Middle East conflict on growth and inflation in the broader EM space, as well as fund flow shifts driven by changes in risk sentiment.

Asia

Asia underperformed other EM regions in April amid a risk-on environment. We maintain a Neutral stance, supported by stable fundamentals and favourable technicals, although exposure to prolonged oil disruption risks varies across countries.

China’s April Politburo meeting was largely uneventful, with a focus on energy security, technological self-reliance, and supply chain resilience. Stronger-than-expected growth and ample liquidity reduced the urgency for monetary easing, with no signals of rate or RRR cuts.

However, policymakers reiterated support for a proactive fiscal stance and moderately loose monetary policy. Priorities also include stabilising the property market, managing local government debt risks, and ensuring smooth functioning of local governments.

Emerging Market Sovereigns

Hard currency EM sovereign bonds rebounded strongly in April as geopolitical risk premia eased, allowing fundamentals to reassert.

We remain constructive on EM sovereign debt, favouring carry-rich credits that compensate for residual volatility. Improved conditions – following the US-Iran ceasefire and stabilising US rates – provide a supportive backdrop, though selectivity is key.

We prefer issuers with credible fiscal consolidation and strong multilateral support, while remaining cautious on lower-rated sovereigns facing significant refinancing pressures from late 2026.

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