Continue to favour high-quality credits
Continue to favour high-quality credits
Credit markets in July reflected the impact of rising US Treasury yields, moderately wider spreads and greater dispersion. While fundamentals remain broadly stable and higher bond yields support return potential, ongoing rate volatility and bond issuance warrant neutral duration stance and selective focus on high-quality credits.
Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore
Bond markets faced a challenging environment in July as rising government bond yields, heavy bond issuance and geopolitical uncertainty weighed on performance. Credit spreads widened modestly, while interest rate volatility remained elevated. Although these conditions may continue to create short-term pressure, they also reinforce the importance of maintaining a balanced and selective approach within fixed income portfolios.
We continue to favour high-quality bonds and maintain a Neutral stance on overall portfolio duration. A weighted average portfolio duration of three to seven years remains appropriate, offering investors flexibility while limiting exposure to significant interest rate movements.
Within developed markets, we prefer Investment Grade (IG) bonds over High Yield (HY) bonds. The current stage of the credit cycle and HY valuations support this positioning. At the same time, large volumes of bond issuance linked to artificial intelligence (AI) investment and merger and acquisition activity may increase performance differences across sectors and issuers, making security selection increasingly important.
Within emerging markets, we remain Neutral on Asian corporate bonds.
Rates and US Treasuries
US Treasury yields moved higher during July, particularly at the longer end of the yield curve, following the Federal Reserve's July policy meeting.
Markets continue to focus on the path of US inflation and the timing of future interest rate decisions. While policymakers remain committed to bringing inflation back towards the Fed's 2% target, uncertainty around the pace of progress has contributed to higher market volatility.
Looking ahead, long-term Treasury yields are likely to remain volatile. Several factors may contribute to this, including reduced policy guidance from the Federal Reserve, a higher term premium demanded by investors and increased issuance of longer-dated corporate bonds. Geopolitical developments and fluctuations in oil prices could also influence inflation expectations and interest rate movements in the coming months.
Against this backdrop, we believe investors should avoid making aggressive duration calls and instead focus on maintaining balanced exposure across different parts of the bond market.
Developed Markets
Developed market corporate bonds came under pressure in July as government bond yields rose and investors became slightly more cautious, resulting in wider credit spreads and lower bond prices.
Key concerns remain largely unchanged. Investors continue to monitor inflation trends, central bank policy, geopolitical developments and the sustainability of AI-related investment spending.
Within the US investment grade market, spreads widened slightly during the month while yields moved higher. Primary market activity remained very strong, with companies continuing to issue large volumes of new debt. This combination of heavy supply and rising rates may continue to create short-term pressure on performance.
The high yield market also experienced spread widening, although returns were relatively resilient compared with investment grade bonds. Importantly, market performance varied significantly across sectors.
Technology and communications bonds faced pressure due to concerns about AI-related spending and increased bond issuance from companies funding investment plans. In contrast, Energy and Financials performed better and experienced tighter spreads during the month.
Another important trend is the growing difference between higher-quality and lower-quality issuers. Lower-rated bonds underperformed significantly. This highlights investors' preference for quality as market conditions become more challenging.
Given these dynamics, we continue to prefer investment grade bonds over high yield bonds.
Emerging Market Corporates
Emerging market corporate bonds outperformed both developed market corporate bonds and emerging market sovereign bonds during July, largely due to their shorter duration profile.
Because many emerging market corporate bonds have lower sensitivity to interest rate movements, they have been better protected from the rise in US Treasury yields. This does not mean risks have disappeared, but it does provide some support during periods of rising rates.
Asia
Asian corporate bonds were among the better-performing segments of the emerging market universe. The region benefited from its relatively defensive characteristics and strong domestic investor base.
We maintain a Neutral view on Asian corporate bonds. Shorter duration, stable credit fundamentals and supportive market conditions should continue to support returns through carry income.
We continue to favour higher-quality rated issuers and selected subordinated bonds issued by strong investment grade companies where investors can earn additional yield without taking excessive risk.
Importantly, we have not seen broad deterioration in the underlying fundamentals of Asian technology companies despite the recent sell-off in technology shares. Current weakness appears to be driven more by market sentiment than by a meaningful deterioration in earnings or business performance.
Should the technology correction continue, however, the impact is likely to vary across sectors. Memory chip producers and AI-related investment vehicles may face greater pressure, while hardware manufacturers could benefit from lower component costs if end-user demand remains healthy.
Emerging Market Sovereigns
Emerging market sovereign bonds faced a difficult month as higher US Treasury yields, renewed Middle East tensions and concerns over global trade weighed on sentiment.
The key challenge for the asset class remains interest rate risk rather than credit risk. In fact, the month's performance reinforced a broader theme across fixed income markets: duration matters more than credit quality in the current environment.
Investment grade sovereign bonds were more heavily affected because of their longer duration profiles. In contrast, high yield sovereign bonds proved more resilient, supported by higher income levels and lower sensitivity to rising rates.
We retain a cautiously constructive but still defensive view on EM sovereign bonds.
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