Macro Update

Investment market volatility intensified in July, primarily driven by a sharp rise in U.S. Treasury yields. Escalating U.S.-Iran geopolitical tensions, coupled with lingering doubts over whether Fed Chair Kevin Warsh can effectively translate his hawkish stance into concrete policy actions, led investors to demand a higher policy credibility premium. Meanwhile, oil prices surged by nearly 22% during the month, rekindling concerns over longer-term inflation. Potential risks associated with US Treasury and corporate debt issuance, together with growing skepticism about the Federal Reserve’s commitment to bringing inflation under control, further contributed to a bear steepening of the US Treasury yield curve. As a result, 2-year, 10-year and 30-year U.S. Treasury yields rose by 12bps, 27bps and 32bps, respectively, to 4.29%, 4.73% and 5.27%.

Economic data painted a mixed picture. US inflation indicators provided some relief, with both June CPI and core PCE coming in softer than expected, while payroll growth slowed sharply to 57k, well below consensus forecasts. However, the unemployment rate fell to 4.2% as labour force participation declined. Growth momentum also moderated, with 2Q26 GDP expanding at a below-consensus annualised pace of 1.5%, despite resilient consumer spending. As a result, concerns that higher oil prices and a still-resilient economy could keep inflation elevated contributed to the rise in long-end yields throughout the month.

Credit Strategy and Portfolio Changes

The sharp rise in US Treasury yields weighed on investment-grade credit and duration-sensitive assets. US investment-grade (IG) yields increased by 26bp to 5.46%, while spreads widened 3bp to 79bp. Technology and AI-linked credits underperformed, with spreads widening by 12bp. Despite the volatility, the move was largely driven by technical factors, including expectations of heavy bond supply and rising debt burdens associated with increased leverage. This left all-in yields more attractive and created selective opportunities in high-quality IG and technology issuers. While front-end credit remained relatively resilient, long-duration bonds continued to struggle. We maintain a cautious stance and a largely neutral duration position across our IG portfolios.

Following benign July inflation data, markets have pared back expectations for further Fed tightening, with only one 25bp rate hike currently priced in by December 2026. We expect the US economy to remain resilient, supported by a stable labour market, AI-driven capital expenditure and fiscal expansion, allowing policy rates to remain higher for longer. While long-end US Treasury yields are likely to remain range-bound in the near term, markets will continue to reassess term premia, fiscal sustainability and the medium-term inflation outlook.

Asia credit markets remained resilient in July despite a challenging global rates backdrop, with Asia IG spreads widening by only 3bp to 118bp even as US Treasury yields moved sharply higher.

The underperformance was concentrated in longer-dated BBB credits as risk sentiment weakened. High-quality Korean quasi-sovereigns and Hong Kong corporates performed well. Indonesian sovereign bonds widened, particularly at the long end, amid ongoing concerns over fiscal management and governance, while Indian credits broadly traded firmer. Australian financials were largely unchanged during the month, while Japanese financials widened modestly. Overall, stable credit fundamentals and contained spread movements underscored the defensive characteristics of Asia IG amid elevated global market volatility.

Asia high-yield (HY) credit delivered a resilient performance in July despite a weaker rates backdrop, with spreads tightening 19bp to 347bp. Performance was mixed across sectors, with Macau gaming credits coming under pressure following weaker June gross gaming revenue due to the World Cup. Frontier sovereigns remained relatively stable, led by stronger performance from Sri Lanka. Technical conditions in China HY also improved due to the lack of new issuance in the sector. Credit selection remained critical amid heightened market volatility.

^{Value Partners, Bloomberg, Morningstar as at 31 July 2026. Performance in USD.}

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