Marco Update

Stronger-than-expected US GDP growth in 2Q25, expanding at a 3.0% annualized pace, was primarily driven by net exports, while domestic demand showed signs of slowing. Inflation pressures persisted, with June CPI data revealing upward pressure in core goods prices, which contributed to a rise in US Treasury (UST) yields. The higher yield was further amplified by headline noise surrounding Fed independence. Meanwhile, the July nonfarm payrolls report delivered a significant downside surprise, with only 73K jobs added versus the 110K consensus and sharp downward revisions to prior months, raising concerns about labor market softness and fueling expectations for faster rate cuts. US rates recovered, with the 10-year yield falling from its mid-July peak of 4.48% to 4.21%, as dovish bets intensified. Fiscal concerns also deepened, with publicly held debt reaching USD29.5 trillion, driven by tax cuts and elevated spending, adding pressure on long-end yields.

In China, 2Q25 GDP rose 5.2% year-on-year, though weakness in retail sales and fixed investment growth remained key pressure points. Chinese government bond yields climbed to 1.71%, from 1.65% at the month start, as markets braced for a potential US-China trade deal and anticipated further fiscal support and bond issuance to facilitate growth.

Overall, trade tensions eased modestly amid progress in US-Japan and other bilateral talks, though broader global negotiations continued to inject volatility into bond markets.

Credit Strategy and Portfolio Changes

Despite the ongoing concern about stagflation in the US, Asia dollar bonds performed well. Both Asia Investment Grade (IG) and Asia High Yield (HY) spreads tightened by 14bps and 31bps to 127bps and 557bps, respectively. Overall, HY return outperformed IG for the month.

While the weaker US job report supports the dovish narrative, goods price inflation may accelerate in the coming months as tariff impacts begin to materialize, potentially derailing rate cut expectations. For a September cut to materialize, upcoming inflation data will need to align with market hopes.

In investment grade, all-in yields remain attractive. Our portfolio of investment grade bonds benefited from a drop in UST yields. Nonetheless, we remain cautious about extending duration, as tariff-led inflation and fiscal risks are not fully priced in, and seek better opportunities as US rates moved.

Following the US announcement of a 25% reciprocal tariff on Indian imports, an additional 25% penalty will be imposed in response to India’s continued purchases of discounted Russian oil. India is likely to see slower growth as exports to the US account for 2.3% of GDP. That said, sustained lower inflation shall support a lower rate environment and cheaper onshore funding costs. The tariffs news has no impact on Indian credits in our portfolio, including renewables and commodity names, as they are not directly exposed to tariff risks. Overall, India USD bond prices have remained stable following the announcement.

Asian high yield notably outperformed, supported by limited bond supply and yield chasing. The segment continues to benefit from diversified sector and regional exposure, as well as solid fundamentals among issuers that are relatively insulated from direct tariff impacts. As credit spreads narrowed, we took profit on select high-dollar-price bonds in the property sector.

^{Source: Value Partners, Bloomberg, MSCI, as at 31 July 2025.
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