Credit markets remained resilient despite a host of macro uncertainties, including renewed trade tensions, political uncertainty and a weaker US labour market.

Continued inflows into fixed income products remained strong, reflecting optimism in the face of the Fed’s pivot to rate cuts. Credit spreads continued to compress as rate volatility eased. Returns were positive across the asset class. As risk premia 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.

We maintain a quality bias in Fixed Income. In DM we prefer Investment Grade (IG) over High Yield (HY).

Within EM, we are Underweight on EM Sovereigns, preferring EM Corporates on better fundamentals and valuation.

Rates and US Treasuries

Over the past month, yields on US Treasuries (USTs) first dipped in anticipation of the Fed’s first rate cut for 2025, only to rebound in the second half as resilient economic data tempered easing expectations. This pattern was noticeable across the entire yield curve, reflecting a mix of monetary policy shifts and strong indicators like low jobless claims and upward GDP revisions.

The Fed delivered a 25 basis points (bps) rate cut at the September Federal Open Market Committee (FOMC) meeting, lowering the fed funds rate to 4%–4.25%. This was framed as a precautionary step given concerns about the jobs market. Chairman Jerome Powell’s post-meeting remarks emphasised data dependency, with projections indicating an additional 75bps of easing through 2025, alongside a 2025 forecast for a GDP growth rate of 1.6% and an unemployment rate of 4.5%. August’s consumer price index (CPI) showed headline inflation at 2.9% year-on-year (YoY), tempering aggressive rate cut expectations while highlighting persistent price pressures in sectors like housing and auto.

We expect long-end UST yields will continue to face upward pressures, driven by rising term premia as investors demand higher compensation for duration risk amid fiscal and policy uncertainties. Structural concerns, such as fiscal deficits and the inflationary implications of tariffs, keep longer maturities under pressure. Political noise also influences market sentiment. Although questioning the Fed’s independence may fuel dovish bets on near-term policy, it simultaneously reinforces concerns about longer-term inflation expectations and the credibility of policy frameworks.

We continue to recommend positioning for lower yields and a steeper UST curve. We remain Neutral on duration. We are cautious on long-end (30Y) nominal USTs but would keep a close watch on the Treasury’s funding strategies and supplementary leverage ratio (SLR) reform in reducing term premium.

Developed markets

The global economy faced a complex landscape in September, including renewed trade tensions, political uncertainties and weaker US labour data. However, the credit market remained resilient. Credit spreads continue to grind tighter in September, reflecting strong investor appetite amidst rate cut pivots by the Fed. Credit spreads are now near all-time tights across IG and HY, affording little cushion against unexpected downturns.

While the latest economic data do not point to an imminent recession, we remain mindful of the risk that growth concerns could re-emerge and exert a widening pressure on credit spreads. Recent economic releases point to a mixed picture of the US economy. Labour market and consumer spending indicators showed some cooling, yet progress has been uneven in inflation prints. Taken together, the data signals a deceleration of growth but leaves markets sensitive to negative surprises.

Against this backdrop, we see scope for periodic growth scares to unsettle risk sentiment and widen credit spreads. We recommend a Neutral positioning on DM IG bonds and an Underweight on DM HY bonds. We prefer going up for quality, for example preferring “A”-rated bonds to “BBB” -ratings in DM IG, and “BB” more than “B” in HY given the little spread compensation for going down the rating spectrum.

Emerging Markets 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 credits posted a total return of 0.93% in September 2025, supported by both spread compression and lower UST yields. Compared to the US, Asia IG (+0.8%) underperformed US IG (+1.3%), but Asia HY (+1.8%) outperformed US HY (+0.7%). Long duration bonds were generally well supported by the rally in the long-end USTs in September.

Within Asia, Hong Kong and Taiwan outperformed in September, driven by idiosyncratic credit stories for the former and a longer spread duration profile for the latter. Lower beta segments such as South Korea and Singapore lagged during the month. On a year-to-date (YTD) basis, India, Macau, Indonesia and Thailand stood out in total returns performance amongst its Asian peers.

Fitch revised Thailand’s sovereign rating outlook in September to negative from stable on rising risks to public finances from prolonged political uncertainty and weakening growth prospects. This came after a similar adjustment from Moody’s in April 2025. We continue to expect Thailand’s soft economic recovery momentum to remain a drag on Thai banks’ fundamentals and remain selective in the space.

For China, consumption trends and patterns during the Golden Week holiday as well as the upcoming Fourth Plenum to be held on 20-23 October 2025 are key points of focus. We look towards an outline of the 15th Five-Year Plan after the Fourth Plenum, although a comprehensive plan with detailed targets may only be available in March 2026.

Emerging Markets Sovereigns

Hard currency EM sovereign bonds returned a respectable 1.8% in September, bringing its year to-date (YTD) performance to 10.7%. IG sovereigns led total returns, in contrast to the previous month, returning 1.9%, compared to 1.7% for their HY peers. HY sovereigns have now returned 12.1% YTD, compared to 9.1% for IG. Local currency sovereign bonds posted a more modest 1.3% gain, lifting their YTD return to 15.3%, supported by broad domestic central bank rate easing, following a period of peak policy rates and elevated real interest rate differentials versus the US.

September’s performance was driven by continued inflows into EM debt funds, improving fiscal metrics across key issuers, and growing market conviction around another Fed rate cut in 4Q2025. The US Dollar weakened modestly again, supporting EM currencies, while commodity exporters benefited from firmer oil and metals prices. EM sovereign spreads tightened by 14bps on average.

Looking ahead, EM sovereigns remain well-positioned amid a supportive global backdrop. Real yields remain attractive, especially in parts of Asia, while improving external balances and currency reserve accumulation offer buffers against external shocks. However, geopolitical risks − particularly in the Middle East and Eastern Europe − could re-emerge, necessitating more selective positioning.