Marco Update

US rates bear‑flattened through March following the outbreak of the US‑Iran conflict in late February, as surging energy prices and renewed inflation concerns drove a sharp repricing of global monetary policy expectations. The 10‑year UST yield peaked at 4.43% during the month, while the US 2s–10s spread narrowed to 52.4bps by the end of March. Escalating Middle East tensions disrupted global energy flows, pushing Brent above $118/bbl and prompting an upward revision to forward commodity assumptions.

US activity data remained broadly resilient, with ISMs in expansionary territory and labor conditions tight, though consumer indicators softened. The Fed held rates at 3.5–3.75%, while the dot plot continued to signal one rate cut each in 2026 and 2027, alongside an upward revision to the 2026 economic outlook. Meanwhile, inflation concerns have revived the “higher for longer” narrative. Despite the continued risk that a closure of the Strait of Hormuz poses to oil prices, ongoing ceasefire talks since mid‑April have provided a boost to market sentiment.

Credit Strategy and Portfolio Changes

Asia credit markets weakened further in March amid heightened geopolitical tensions, energy‑driven volatility in global rates, and a deterioration in risk sentiment. Asia Investment Grade (IG) and High Yield (HY) bond spreads widened by 12bps and 80bps, respectively, with high‑beta and long‑duration names underperforming. As ceasefire negotiations resumed, spreads retraced part of the move; month‑to‑date, Asian IG spreads have tightened by 5bps.

Asia IG came under pressure in March amid heightened macro and geopolitics‑driven volatility. The spread widening was concentrated mainly in BBB‑rated credits, particularly issuers with higher dependence on energy imports, including those in Indonesia, the Philippines, India, and South Korea. In contrast, China IG bonds saw modest spread tightening, supported by strong domestic institutional demand and China’s relatively limited exposure to global energy supply disruptions.

Overall, the Federal Reserve does not appear under pressure to cut rates in the near term. The US labor market remains resilient, with no clear signs of material weakness. Moreover, even if geopolitical tensions ease and ceasefire arrangements materialize, input‑cost stickiness remains elevated. Hence, we do not expect oil prices to fall sharply even in a ceasefire scenario. Historical experience suggests that a 10% increase in oil prices typically adds around 0.35 percentage points to headline CPI over a three‑month horizon. Over the coming months, expectations are likely to oscillate within a “limited or one‑cut” range, reflecting ongoing uncertainty over whether inflation pressures are transitory and the lingering risk of stagflation. In light of this, we continue to favour a slightly underweight duration stance.

In Asia, HY markets weakened meaningfully during March, given their higher beta nature. Frontier sovereigns underperformed sharply, led by Sri Lanka and Pakistan, while Mongolia’s financials and mining names also lagged. That said, those segments have already retraced roughly 70-80% of the March move. Overall, we remain cautious and defensive in this space, continuing to favor issuers with resilient balance sheets and proven market access while avoiding those names with lower market liquidity.

^{Source: Value Partners, Bloomberg, as at 31 March 2026.
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