We prefer to stay with high quality issuers amidst higher market volatility. We continue to be Neutral on portfolio duration.

Eli Lee
Chief Investment Strategist,
Bank of Singapore

Credit markets have remained relatively resilient so far this year, despite a confluence of pressures —including heightened geopolitical tensions, renewed tariff uncertainty, concerns about AI-driven disruption in vulnerable sectors, and rising stress in private markets. Year-to-date (YTD), total returns have been positive across all segments.

While credit spreads may continue to widen as investors demand a higher risk premium amid a more uncertain macroeconomic environment, interest rates could help offset some of this pressure and support total returns in the near term, assuming no major oil shock. However, an extended conflict in the Middle East would likely weigh on risk sentiment. Looking ahead, we expect greater performance dispersion and continue to favour high-quality issuers.

We also view emerging markets (EMs) as useful diversifiers within global bond portfolios. Although near-term sentiment could soften due to geopolitical developments in the Middle East, selective exposure to EM bonds can offer meaningful diversification benefits for global investors over the medium to long term—particularly against the backdrop of growing structural concerns about a weaker US Dollar (USD) and deteriorating fiscal dynamics in major developed economies.

US Treasuries

US Treasuries (UST) delivered one of their strongest monthly returns in February 2026, supported by declines in both real yields and inflation expectations. The UST yield curve also flattened, with the 2Y–10Y spread narrowing by 13 bps year‑to‑date to 56 bps.

Our base case remains one 25 bps Fed funds rate cut in 2026, though we have shifted the expected timing from March to June. Meanwhile, Fed funds futures continue to price in slightly more than two 25 bps cuts this year, with most of the easing expected after June.

While USTs rallied on safe‑haven demand amid tensions in the Middle East, we remain cautious about potential volatility in long‑dated yields due to elevated fiscal risks and the possibility of rising inflation expectations if the geopolitical conflict persists.

Looking ahead, UST performance is likely to remain sensitive to evolving macroeconomic signals. The key drivers to watch include inflation trends, labour market conditions, and fiscal deficits.

We maintain a Neutral stance on portfolio duration. A weighted average duration of three to seven years provides flexibility across different market environments. Softer macro data or lower‑than‑expected inflation could create opportunities to extend duration, whereas sticky inflation or renewed fiscal concerns could lead to curve steepening.

Developed Markets

Late-cycle credit dynamics and relatively unattractive valuations continue to favour Developed Market Investment Grade (DM IG) over High Yield (DM HY). We therefore maintain a Neutral stance on DM IG bonds and an Underweight stance on DM HY bonds.

That said, growing funding needs from hyperscalers—driven by rising AI-related capital expenditure—could create supply pressures in the US IG market. This may lead to wider spreads and/or longer benchmark duration. We also expect major US technology companies to increasingly tap non-USD bond markets to diversify their investor base. In addition, private credit markets, complex SPV structures, chip-backed loans, convertible bonds, and equity issuance could emerge as alternative financing channels.

We anticipate tighter scrutiny around AI-related risks, which could contribute to higher market volatility and greater dispersion in performance. As a result, we see a stronger need to focus on quality, conduct deeper credit analysis, and identify potential winners and losers from AI-driven disruption to protect portfolios and position for future valuation or market-dislocation opportunities.

In Japan, government bond (JGB) yields have partially retraced their recent rise following signals of fiscal pragmatism from the Takaichi administration. A recent proposal to change impairment-related accounting rules is also supportive for Japanese life insurers, as it should ease the negative feedback loop between JGB price declines and lifer balance-sheet risks. Nevertheless, we remain cautious about the potential for higher JGB volatility and will closely monitor upcoming fiscal and monetary policy developments.

Emerging Markets Corporates

Emerging Market (EM) corporates have continued to outperform their DM peers year-to-date. In 2026, we expect total returns to moderate but remain supported by attractive carry and favourable market technicals.

In the near term, we are monitoring the potential impact of the Middle East conflict on the broader EM universe, particularly through its influence on oil prices and overall risk sentiment.

Asia

Asian credit markets have delivered total returns of 1.5% year-to-date as of 27 February 2026, slightly lagging other EM regions. Within Asia, Hong Kong, India, Taiwan and Thailand have been the relative outperformers.

Although yields in Asia remain comparatively lower, the region continues to offer a more defensive profile within the EM space. Combined with strong technical support, this keeps us Neutral on Asian credits. In 2026, carry is expected to remain a key driver of total returns. To enhance yield, we prefer moving down the capital structure of high-quality financials and corporates.

In Thailand, improved political stability following the recent election and targeted government support for small and medium-sized enterprises (SMEs) may help ease near-term asset-quality concerns, especially in the retail and SME loan segments. However, structural challenges remain, and we maintain a negative credit outlook on the Thai banks under our coverage for now.

For India, the FY2027 budget prioritizes infrastructure development and high-value manufacturing. Continued solid economic growth should support corporate operating performance throughout the year. We remain constructive on Indian credits, but given relatively tight spreads, our approach remains selective.

Emerging Markets Sovereigns

Hard-currency EM sovereign bonds extended their gains in February, supported by healthy risk appetite. The asset class delivered a modest return of +1.4%, with IG sovereigns outperforming HY. Strong contributors included Chile (+2.3%), Latvia (+2.4%), Poland (+2.3%), and Uruguay (+2.3%).

Across regions, performance was broadly positive, though uneven. Latin America (+1.5%), Europe (+1.5%), and the Middle East (+1.4%) led monthly gains.

Sovereign spreads widened by 14bps, driven mainly by the HY segment (+20bps). Africa remains the widest-spread region at around 406bps, followed by Latin America (~358bps). Asia remains the tightest at approximately 152bps, supported by stronger reserves and more stable macro fundamentals.

February’s performance benefited from a stable US rates environment and expectations that developed market central banks will begin easing later in 2026. The US dollar traded within a narrow but generally weak range, reducing external pressure on EM balance sheets. Commodity exporters were helped by stable energy and metals prices, supporting fiscal consolidation and improving external balances.

Looking ahead, EM sovereigns continue to offer attractive opportunities, particularly in HY and selected frontier markets where reform momentum is credible. However, risks remain, especially from geopolitical tensions and potential shifts in global interest-rate expectations.

We remain constructive overall and continue to favour “BB”-rated sovereigns with improving debt dynamics, along with selective positions in reform-driven frontier markets where valuations remain appealing.