We remain Neutral on overall portfolio duration but currently favour positioning closer to a three- to five-year range, while preserving dry powder to selectively add duration should valuations become more compelling.

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

We continue to expect interest rates to remain higher for longer and maintain a cautious stance on fixed income. While the scope for bond price appreciation appears relatively limited, elevated yields have significantly enhanced carry opportunities and improved forward return potential across fixed income markets.

Credit markets are likely to remain shaped by rates volatility, persistent bond supply pressures, and increasing dispersion across issuers, which could lead to modest spread widening in the near term. Although the risk of further yield volatility remains elevated, higher US Treasury yields have created more attractive income opportunities for investors seeking yield.

Against this backdrop, we maintain a modest Underweight position in fixed income and remain Neutral on overall portfolio duration. Within duration, we favour positioning in the 3–5-year segment of the curve while retaining flexibility to selectively add duration should valuations become more compelling. Across credit markets, we continue to prefer Developed Markets (DM) Investment Grade (IG) bonds over High Yield (HY), while in Emerging Markets (EM) we remain Neutral on corporate credit and Underweight on sovereign debt.

Rates and US Treasuries

The recent rise in US Treasury yields reinforces the importance of disciplined duration management. While current yield levels appear increasingly attractive, history suggests that interest rates can continue to move higher even after the Federal Reserve delivers its first rate hike. Yield curves have typically continued to flatten, with 10-year Treasury yields often peaking only two to three months later.

Against this backdrop, we believe it remains premature to extend portfolio duration aggressively. Nevertheless, longer-dated US Treasuries continue to play a valuable role as portfolio diversifiers and potential hedges against a growth slowdown or a decline in yields. Given their heightened sensitivity to interest rate movements, however, duration exposure should be added selectively and opportunistically rather than through a broad-based extension at current levels.

In a higher-for-longer interest rate environment, investors can continue to capture attractive carry through shorter-dated fixed income and credit exposures without assuming excessive duration risk. This approach also preserves flexibility to extend duration at more compelling entry points should yields overshoot or the outlook for Federal Reserve policy become clearer. As a result, portfolios can remain invested, generate income and retain optionality while awaiting greater clarity on the path of inflation, growth and interest rates.

Developed Markets

DM corporate credit delivered negative returns in September as rising government bond yields and continued supply pressures weighed on performance. Japanese and Australian credits proved relatively resilient, returning -1.7% and -1.8% respectively, outperforming both US (-2.5%) and European (-2.0%) markets.

We remain constructive on Japanese credit as the economy continues its transition from deflation to reflation. Corporate fundamentals remain broadly resilient, supported by a large base of highly rated financial institutions, particularly banks and insurers, which provide diversification and attractive income opportunities. While increased bond issuance is expanding the investment opportunity set, heavier supply may periodically pressure spreads, reinforcing the importance of careful security selection and disciplined entry points.

In the US, IG credit spreads widened modestly during September, although headline moves masked meaningful divergence beneath the surface. Cyclical sectors such as automotive, leisure and media underperformed amid increased issuance and a less supportive market backdrop, while more defensive sectors, including consumer products and healthcare, demonstrated greater resilience and outperformed.

US HY bonds fared no better despite their shorter duration profile. Wider credit spreads, heavy issuance and broader risk aversion resulted in losses comparable to the IG market, making September the weakest month for the asset class since September 2022. Yield-to-worst rose to its highest level since April 2025 as higher US Treasury yields and wider spreads improved income levels across the market. Within HY, higher-quality "B"- and "BB"-rated bonds outperformed the lower-quality "CCC" segment, reflecting investors' preference for quality amid a more uncertain environment.

As market dispersion continues to increase across regions, sectors and issuers, active management and rigorous credit selection are likely to play an increasingly important role in generating returns. We continue to favour high-quality credit exposures and believe investors should remain selective, focusing on issuers with resilient fundamentals and attractive risk-adjusted income opportunities.

Emerging Market Corporates

EM corporate bonds outperformed both DM corporate credit and EM sovereign debt in September, demonstrating greater resilience amid rising yields and volatile market conditions. Although EM corporate spreads offer a smaller cushion relative to some other credit segments, the asset class generally remains less sensitive to higher interest rates, albeit with meaningful differences across sectors and regions.

We continue to see merit in maintaining selective exposure to high-quality EM corporate bonds, given their diversification benefits and attractive long-term income potential. That said, investors should remain mindful of external risks. Any broad-based spread widening in US credit markets could spill over into EM credit through technical and sentiment channels, creating periods of volatility. In this environment, careful security selection remains critical, with a preference for issuers supported by strong fundamentals and resilient balance sheets.

Asia

Asian credit markets were not immune to the headwinds from rising global yields, generating negative total returns in September. However, the asset class remained relatively resilient and outperformed broader EM peers, supported by its lower duration profile and more stable credit spreads.

We maintain a Neutral stance on Asian corporates, underpinned by several structural strengths. Compared with many other EM credit markets, Asian issuers generally benefit from ample domestic liquidity, diversified funding sources and better access to local capital markets, which help cushion the impact of external shocks. Against a backdrop of stable corporate fundamentals, we expect carry to remain the primary driver of returns.

In China, policymakers stepped up efforts to support growth through a range of targeted fiscal and monetary measures announced on 29 September. These included a 25bps cut in the Pledged Supplementary Lending (PSL) rate, expanded support for infrastructure-related "Six Networks" projects, larger relending quotas, and mortgage interest subsidies for eligible first-home buyers. The measures reinforce policymakers' commitment to stabilising economic activity and restoring confidence, although their ultimate effectiveness will depend on the pace and scale of implementation.

The mortgage subsidy programme should provide some near-term support to housing demand, particularly in lower-tier cities. However, we expect the broader impact on economic growth and property prices to be more modest, given the scheme's relatively tight eligibility requirements and the continued overhang from elevated housing inventories. As such, while the latest easing measures should help stabilise conditions, they are unlikely to mark a decisive turning point for the property sector in the near term.

Emerging Market Sovereigns

Hard-currency Emerging Market (EM) sovereign bonds came under pressure in September, with higher US Treasury yields more than offsetting the benefit of carry. Performance was weakest among longer-duration sovereign bonds, highlighting the market's sensitivity to rising global rates, while credit spreads widened only modestly during the month. IG sovereigns outperformed their HY counterparts as investors became increasingly selective amid rising funding costs and refinancing risks, leading lower-rated issuers to lag.

Central bank responses across EM have become increasingly differentiated as policymakers balance domestic economic conditions against a challenging global backdrop. Brazil continued its easing cycle, South Africa tightened monetary policy further, while Türkiye and Indonesia kept policy rates unchanged. For investors in US Dollar (USD)-denominated sovereign debt, the key consideration is not merely the direction of interest rates, but how policy decisions influence inflation credibility, external balances and future sovereign financing requirements.

While higher all-in yields have improved the income appeal of EM sovereign bonds, September underscored that elevated starting yields provide only limited protection during periods of sharp US Treasury market sell-offs. Against this backdrop, we continue to favour short-to-intermediate maturities, where the balance between yield and interest-rate risk remains more attractive. We also maintain a preference for countries with manageable external financing needs, credible fiscal frameworks and adequate liquidity buffers.

Within the USD HY sovereign universe, we remain selective and favour issuers with a clear and credible funding path rather than those relying primarily on further spread compression to drive returns. This leads us to prefer higher-quality HY sovereigns, particularly those rated BB- and above, where fundamentals appear better positioned to withstand a higher-for-longer rates environment.