Rates volatility
Rates volatility
In fixed income, we are maintaining a modest overall Underweight and staying Neutral on portfolio duration.
Eli Lee
Managing Director,
Chief Investment Strategist,
Bank of Singapore
We expect developments in the Middle East conflict, along with the related volatility in oil prices and broader risk sentiment to remain key drivers of the global rates and credit markets in June. Additionally, markets are also likely to watch for policy signals from the incoming Fed Chair Kevin Warsh.
Within fixed income, the focus remains on resilience as we expect elevated market and rates volatility and downside risks, especially if inflationary risks persist and monetary easing is delayed. Active duration management and diversification are critical against this backdrop — we continue to favour high-quality and defensive credits and maintain our Neutral view on duration at the portfolio level.
Looking ahead, US Treasuries will remain sensitive to shifts in inflation, labour markets and fiscal deficits. A weighted average duration of three to seven years offers flexibility amid changing market conditions.
In Developed Markets (DM), we prefer Investment Grade (IG) over High Yield (HY) bonds. In Emerging Markets (EM) corporates, we hold a Neutral view on Asia.
Developed Markets
Despite rates volatility in May, corporate credit performance remained resilient, with spreads narrowing back toward the YTD lows reached in January.
With DM HY and IG yield differential below the historical average, we maintain a Neutral position on DM IG bonds and an Underweight position on DM HY bonds. However, heavy bond supply for artificial intelligence (AI) CAPEX and M&A, along with rate volatility, may increase performance dispersion and negatively impact DM IG.
Emerging Market Corporates
Strong global growth has continued to drive total returns performance in EM corporates. Despite tight spreads and inflation-driven rate pressures, EM USD corporate bonds are likely to be less exposed to rising rates, but with sector and regional variations. Select quality EM bond exposure offers global investors diversification amid long-term USD weakness and deteriorating fiscal conditions in major developed economies.
Asia
Compared to the broader EM Corporate Index, Asia has outperformed month-to-date (MTD) but continued to lag on a YTD basis, a reflection of the more defensive nature of the segment. Within Asia, top YTD underperformers include Indonesia and the Philippines while top outperformers include India and Hong Kong.
We maintain a neutral view on Asian corporates, driven by relatively shorter duration profile, robust domestic funding markets and supportive market technicals. Although the region is relatively more vulnerable to prolonged oil disruptions, the exact net impact is expected to vary across countries. Additionally, the potential effects of an El Niño event should also be closely monitored.
Emerging Market Sovereigns
Looking ahead, we maintain a constructive but selective view on EM sovereigns. We continue to favour sovereigns with strong macro policy anchors, credible fiscal consolidation and manageable near-term amortisations, while remaining cautious on lower-rated credits where market access is still fragile, or where policy uncertainty could undermine recent gains.
We have changed our recommendation for EM Asia sovereign bonds to Underweight from Neutral this month. Several Asian countries including Indonesia, the Philippines and Sri Lanka are highly exposed to higher oil prices, supply disruptions and rising inflation due to the conflict in the Middle East, with the risk of deteriorating macro fundamentals. Furthermore, valuations for EM Asia sovereigns are generally at pre-conflict levels and are not compelling.
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