Credit markets have mostly shrugged off the latest round of geopolitical tension with modest spread widening. Returns were resoundingly positive from rates and spread tightening. As risk premiums have mostly been priced out, we continue to retain a defensive posture across Developed Markets (DM) and Emerging Markets (EM), given little buffer against downside surprises. We continue to be Neutral on duration.

Rates and US Treasuries

Despite a de-escalation of the Middle East tension, US Treasuries (USTs) rallied on the back of dovish Federal Reserve (Fed) comments, weak June consumer confidence and headlines on the supplementary leverage ratio (SLR) reform for large banks.

Fed Chairman Jerome Powell reiterated a consistent message: that the Fed has room to be patient before considering easing monetary policy. However, there has been growing division where several governors expressed dovish comments. The increasingly dovish tone has led to the futures market pricing in total cuts of 28bps by September’s Federal Open Market Committee (FOMC) meeting and 65bps by December. This is higher than our expectations. We continue to see tariff-related price pressures in the coming months.

In the coming month, investors will be watching tariffs and the US budget news closely and these could potentially be market moving.

We remain Neutral on duration. We expect steeper curves as supply pressures could cause long-end rates to underperform. The front-end will likely be anchored lower on expectations of an interest rate cut by the Fed.

Developed markets</strong

Although US Treasury (UST) yields have been trending lower as markets anticipate weaker growth ahead, this has not been reflected in credit spreads which remain near their tights for both Investment Grade (IG) and High Yield (HY) bonds.

As markets received a degree of relief from the now-suspended war in the Middle East, there are several ongoing issues which may cause rates or equity market volatility to rise over the near term. Hence, we see credit spreads are not currently pricing in much cushion for potential downside surprises – either from economic data, or key announcements on tariffs and the US budget.

As such, we see potential for economic data to trend lower over 2H25. We believe additional premiums need to be reflected in current environment. We continue to recommend positioning in defensive sectors among Investment Grade bonds (utilities, pharmaceuticals, banks) and in High Yield BB-rated credits.

We hold a Neutral position on DM IG bonds and an Underweight position on DM HY bonds. We see risks skewed to wider spreads after the recent strong performance. Yet, the outlook for growth remains on the downside.

EM Corporates

With a wide range of variables and uncertainties in 2025, we remain Neutral on EM credits. The weaker global growth outlook and currency volatility could translate into wider EM spreads over the next 12 months, but supportive technical factors could be important mitigating considerations.

Asia

Asia has benefited from a better market sentiment, with IG outperforming HY in June, supported by lower UST yields. However, within EM Corporates, Asia underperformed its African and Latin American peers.

Within Asia, lower beta regions such as Singapore and South Korea posted lower total returns while the performance in longer duration profile segments such as Indonesia and Hong Kong were supported by lower UST yields. Macau, too, turned in strong monthly returns on improved gross gaming revenue (GGR).

Despite renewed political turmoil, Thai credits largely performed in line with Asian peers. In the near term, we expect heightened internal political uncertainty and external headwinds from US tariff uncertainty to add pressure to an already soft economy. While we see risks of negative credit actions at the sovereign level and expect the weak macro environment to remain a drag on Thai banks’ fundamentals, these are partially mitigated by adequate reserve coverage ratios and strong capital ratios at the major Thai banks. We still expect callable capital securities to be redeemed on the first call dates but would like to be more selective in the space. We will be closely monitoring asset quality trends at the banks, economic trends, and political developments in Thailand, as well as Thailand’s trade negotiations with the US.

In the near term, we expect USTs to stay volatile, due to trade policy uncertainties, the debt ceiling X-date possibly in August, and a worsening US budget deficit. As such, we retain a quality bias for Asian credits.