In a reversal of sentiment, credit spreads retreated from the widest point in early April, following a pause on reciprocal tariffs. While sentiments have improved, we think it remains fragile. Hence, we expect market volatility to persist in the coming weeks. Across Developed Markets (DM) and Emerging Markets (EM), we adopt a defensive posture, with a preference for Investment Grade (IG) over High Yield (HY) bonds.

In credits, we maintain a quality bias and maintain Neutral on Developed Markets (DM) and Emerging Markets (EM) Investment Grade (IG) bonds and hold an Underweight position on DM High Yield (HY) and EM HY. There is scope for further widening in credit spreads amidst growth risks from trade tensions.

Rates and US Treasuries

Following a volatile period for US Treasury (UST) yields this month, the 10Y UST yield ended April broadly unchanged at about 4.20%. The 10Y UST yield initially rallied at the start of the month to about 3.90% only to spike up about 70 basis points (bps) over a week to about 4.60%. The UST curve steepened further in April, with yields along the front end (2Y) declining 15bps to 3.75%.

Term premium can be defined as the additional compensation required for investors to bear the risk of interest rate changes over the life of the bond. According to the estimates by the Federal Reserve Bank of New York, term premiums on the 10Y UST have remained high even as the UST yield curve steepened. This could point to fiscal deficit concerns and higher borrowing needs amid waning foreign demand. Higher long-end yields are an unwelcomed development as it raises the borrowing costs of the government, which feeds the fiscal deficit.

This puts a spotlight on the next refunding announcement in early May. While we do not expect any change to the issuance size, we would look to the US Treasury for signs of potential buybacks or a reduction of supply along the long-end. This could provide relief to the supply-demand imbalance along the long-end.

Heightened policy uncertainty from the Trump administration is likely to keep rates volatile. We expect 10Y UST yields to hover in the 4.00-4.50% range in the near term, but remain cautious over the long term given lingering concerns about fiscal deficits.

We remain Neutral on duration. The front-end will likely be anchored lower on expectations of an interest rate cut. The long-end is vulnerable to term premium risk but is skewed to the downside over the near term on growth concerns.

Developed markets

Over the month, IG spreads widened by 5bps and HY spreads by 20bps. Overall, yields have also shifted higher, with IG yields rising by 10bps to 5.51% and by 10bps to 7.61% in HY.

Performance across ratings reflected the increased appetite for credit risk as “BBB” and distressed “CCC” rated credits outperformed. Nevertheless, we remain cautious given heightened uncertainty over fiscal and monetary policy uncertainty, coupled with historically tight spread levels.

While there has been a de-escalation on the tariff war, tariff negotiations will be a complex and drawn-out process. There remains a great deal of uncertainty, and the credit market needs concrete developments for the rally to be sustained. Ultimately, lower volatility in the equity and rates market will help stabilise sentiment.

The primary market has opened once again, allowing high quality issuers to tap the market. We view such developments positively and think investors could participate in the primary market to take advantage of the new issue premium.

We are positioned Neutral on DM IG bonds and Underweight on DM HY bonds as growth concerns could lead to wider spreads.

Emerging markets

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

In Asia, IG outperformed HY in April. In fact, Asia IG has navigated recent market volatility better than US IG and EM IG. In contrast, Asia HY has lost more in total returns in April on re-pricing as the spread differential versus US HY became too tight relative to historical ranges.

Performance within Asian credits has been largely driven by duration and credit quality. On a relative basis, shorter duration and better rated names have outperformed. At the country level, lower beta and higher rated countries such as China, South Korea and Singapore fared better than other Asian peers.

After lagging its peers on fiscal concerns, Indonesia caught up in April (+0.6% total returns vs +0.3% for “BBB” credits), narrowing the year-to-date (YTD) performance gap with “BBB”-rated Asian peers (+2.0% total returns vs +2.4% for “BBB”-credits). Nevertheless, we remain cautious of the lingering uncertainties from tariffs and the fiscal outlook.

Aside from frontiers, Thailand and India were amongst the laggards in April. The PTT complex dragged down Thailand’s monthly performance on rising concerns over the anaemic oil industry outlook. Notably, Moody’s revised Thailand’s sovereign rating outlook from stable to negative at the end of April.

On India, we believe the liquidity positions of corporates, including refinancing needs, is a key credit consideration amidst tariff uncertainty and market volatility. However, for the Indian credits we cover, we believe their liquidity needs are manageable. We are also monitoring the development of tensions with Pakistan, since this could weigh on investor sentiment.