Neutral on duration
Neutral on duration
Higher US Treasury yields support carry and forward returns, but long-end bond buybacks and a hawkish Federal Reserve backdrop could weigh on performance, reinforcing the need for disciplined duration management and credit selection.
Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore
In fixed income, we maintain a modest Underweight position overall and remain Neutral on duration given ongoing market volatility. Within Developed Markets (DM), we prefer Investment Grade (IG) credit over High Yield (HY). In Emerging Markets (EM), we remain Neutral on corporate bonds and Underweight sovereign debt.
We remain Neutral on portfolio duration and currently favour positioning near the midpoint of our strategic 3–7-year duration range while awaiting greater clarity on the interest rate outlook.
Rates and US Treasuries
Rates volatility persisted through August amid several market-moving developments. The US Treasury announced plans to increase long-end bond buybacks after 30-year Treasury yields reached two-decade highs, while hawkish remarks by Kevin Warsh at the Jackson Hole Symposium contributed to a bear flattening of the US Treasury yield curve. Markets are now pricing in more than a 50% probability of a 25bps Fed rate hike at the next meeting.
Bond markets are likely to remain volatile as upcoming inflation and labour market data shape expectations for the September FOMC meeting. Importantly, the increase in nominal yields has been driven primarily by higher real yields rather than inflation expectations. This suggests investors are demanding greater compensation for duration and fiscal risks, reflecting concerns over elevated deficits and debt sustainability rather than a simple repricing of inflation prospects.
Developed Markets
DM corporate credit generated positive returns despite heightened rates volatility, with both IG and HY spreads remaining relatively resilient. However, credit dispersion has become more pronounced. Within IG, Basic Industry and Energy outperformed, while TMT and Retail lagged. Lower-rated BBB issuers and shorter-dated bonds generally performed better, whereas higher-rated AAA and AA issuers and longer maturities saw spread widening, reflecting AI-related financing demand and ongoing supply pressures.
A similar trend is evident in HY markets, where lower-rated CCC issuers continue to underperform higher-quality credits. Sector performance has been mixed, with Energy benefiting from higher oil prices and geopolitical developments, while Insurance, Consumer Goods and Technology have generally experienced spread widening.
The key takeaway is that a passive, index-based approach is becoming less effective. As credit dispersion increases, disciplined credit selection and active curve positioning are playing a more important role in driving returns.
Emerging Market Corporates
EM corporate bonds outperformed their DM peers in August but trailed EM sovereigns. Despite offering a smaller spread cushion, USD-denominated EM corporates are generally less sensitive to rising interest rates, although performance varies across sectors and regions. Selective exposure to high-quality EM credits can provide diversification benefits, though any spillover from spread widening in US IG markets may create near-term technical headwinds.
Asia
Asian credit underperformed most EM peers on both a month-to-date and year-to-date basis as of 28 August 2026, with the exception of the Middle East.
We remain Neutral on Asian corporate bonds, supported by their shorter duration profile, strong domestic funding base and favourable market technicals. Stable fundamentals should continue to support carry returns, while high-quality BB-rated credits and selected subordinated IG securities offer attractive yield opportunities.
In China, the latest housing reform package aims to restore homebuyer confidence and reduce project completion risks by promoting a completed-sales model. Measures include targeted financing support for homebuyers and developers, such as longer mortgage tenors, payment extensions and funding for urban renewal projects. While the reforms should provide meaningful long-term benefits, their near-term impact is likely to be tempered by financial pressures among private developers and unresolved debt challenges in the property sector.
Emerging Market Sovereigns
Hard-currency EM sovereign bonds came under pressure in August as higher US Treasury yields offset carry. Despite this, the asset class delivered a positive return for the month.
Performance was mixed, with shorter-duration and higher-yielding sovereigns outperforming higher-duration IG bonds. Geopolitical risks and oil price volatility remained key market drivers.
We remain cautiously constructive on EM sovereign debt but continue to favour carry over duration. We prefer short- to intermediate-duration bonds, reform-oriented sovereigns and selected higher-yielding credits, while remaining cautious on long-duration IG sovereigns and vulnerable oil-importing economies.
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