In fixed income, we remain Neutral on duration as we expect long-end US Treasury yields to move higher towards 5%. Within Developed Markets fixed income, we hold Neutral and Underweight positions in Investment Grade and High Yield bonds respectively, and within Emerging Markets fixed income, we are Neutral on corporates and Underweight on sovereigns.

Vasu Menon
Managing Director
Global Wealth Management
OCBC Bank

Credit spreads continued to compress as the resilient macro backdrop and a slate of brokered trade deals drove a strong rally. Returns were positive despite higher rates. As risk premium 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.

Rates and US Treasuries

In recent weeks, there are several factors driving US inflation, including the re-escalation of trade war, fears over the erosion of the US Federal Reserve’s (Fed) independence and concerns over the fiscal trajectory. Breakeven spreads have widened across the curve, most noticeably at the front and intermediate sectors. Meanwhile, long-end (30Y) nominal US Treasuries (UST) remain high, driven by higher inflation and term premium.

Fed Chair Jerome Powell highlighted the stagflationary risks from tariffs, which could raise inflation while dampening economic growth. The June consumer price index (CPI) met expectations but showed early signs of tariff pass-throughs in goods prices. We continue to see tariff-related price pressures in the coming months.

Elsewhere, there has been more focus on the Fed Chair transition when Powell’s term ends in May 2026. The new leadership is widely expected to favour lower rates, prompting markets to anticipate a more accommodative stance. This could lead to investors demanding higher yields to compensate for inflation and term premium risks.

On the fiscal side, the recently passed “One Big Beautiful Bill Act” (OBBBA) is projected to add approximately US$3.4 trillion to the fiscal deficit over ten years, driving higher issuance and term premiums. Focus has shifted to the Treasury’s issuance composition with an aim of gradually reducing the weighted-average maturity (WAM) of outstanding debt. We think the composition of future UST issuances could favour front and intermediate maturities.

We remain Neutral on duration. We remain cautious on long-end 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

Spreads tightened in the past month amidst trade deals between the US and Japan/EU which eased concerns over prolonged tariff uncertainty that could keep sentiment tentative. However, UST yields rose on inflation/fiscal concerns, dragging overall returns.

Over the near-term, we expect spreads to be rangebound, muddling through US tariff headlines and a data-dependent Fed. However, with Investment Grade (IG) and High Yield (HY) spreads back to year-to-date (YTD) tight levels, we see little room for further spread compression from here. In fact, credit spreads are currently priced to perfection, with little cushion for any potential downside surprises – as we expect tariff implementation to show a reacceleration of inflation and as growth falters in the coming months.

As such, we continue to recommend a cautious positioning in DM credits. We believe additional premiums are necessary as the US economy heads into a stagflationary environment. We continue to recommend positioning in defensive sectors in IG (utilities, pharma, banks) and in HY (‘BB’-rated credits).

We are positioned Neutral on DM IG bonds and Underweight on DM HY bonds. We see risks skewed to wider spreads after the recent strong performance. Yet the outlook for growth remains on the downside.

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

Month-to-date, Asia credits posted total returns of 0.48% as of 25 July 2025, driven mainly by carry and spread compression, which partially offsets negative contribution from higher UST yields. This brought YTD total returns to 4.4%; still lagging other EM regional peers but better than the US.

Trade deals and better economic data from China have supported market sentiment. As of late July, several Asian countries such as Vietnam, Indonesia, the Philippines, and South Korea, have reached tariff deals with US. Despite averting the worst-case scenario, major Asian economies will still face higher tariffs on a year-on-year (YoY) basis for exports to US that could potentially weigh on growth in 2H2025. Additionally, there remains a lack of clarity on details of the trade deals while the compounding impact via the supply chain is still unknown. Developments in sectoral tariffs also warrant close monitoring.

Strong 2Q2025 GDP data from China implies that immediate growth concerns have eased. However, the persistent structural imbalance between domestic demand and supply remains a significant challenge to policymakers. As expected, no additional major policy stimulus measures were rolled out at the July Politburo meeting. Policy priorities could shift towards structural rebalancing, with more discussions about “anti-involution” on the supply side and encouraging consumption on the demand side. The lingering property market overhang remains a concern. Although large scale easing appears unlikely, new moderate policy support in 4Q2025 cannot be ruled out if sales remain weak.

Emerging Markets Sovereigns

Hard currency EM sovereign bonds returned 1.2% in July, or 6.7% YTD. HY continued to outperform IG for the month (~1.7% vs ~0.7%) as risk sentiment recovered, after the imposition of US tariffs in April and geopolitical headlines in June. Local currency sovereign bonds posted monthly losses of 0.6%, driving their YTD return to a still strong 11.6% at the end July.

Hard currency sovereign bonds benefitted from further spread tightening in July, whereas local currency bond returns were hurt by a strong US Dollar (USD), which gained about 3.0% in July, following weak returns in June. YTD, local currency bond returns remain strong overall, owing to pronounced USD weakness (-7.0% YTD) and falling EM local rates in several key EM countries (e.g. India, Indonesia, Mexico, South Africa, Türkiye). EM hard currency sovereign bonds also continue to outperform their corporate counterparts on a YTD basis, with a total return of 6.9%, compared to 5.0%.