Marco Update

January saw some selling pressure in U.S. Treasuries as market attention centered on the legal battles involving Governor Lisa Cook, the Department of Justice investigation into Fed Chair Jerome Powell, and broader concerns about Federal Reserve independence. Stronger‑than‑expected U.S. economic data and a healthier GDP print also contributed to upward pressure on yields. Overall, Treasury yields widened by 5–7 bps across the curve, with the 2s10s curve steepening slightly to 71bps. At the January FOMC meeting, the Committee held rates steady at 3.50-3.75%, while markets continued to price in two 25bp cuts for 2026. Kevin Warsh’s nomination as the next Fed Chair, given his preference for lower short‑term rates but a smaller Federal Reserve balance sheet, added upward pressure to long‑end yields.

In India, the Union Budget reinforced a path of measured fiscal consolidation. FY26/FY27 deficit targets of 4.4% and 4.3% of GDP remain broadly intact. Although GST assumptions were trimmed, stronger consumption, healthier tax collections, and continued RBI dividends should bolster revenues. Elevated state-level deficits remain a consideration, but the overall fiscal gap continues to narrow, supported by firm growth momentum and increased capex.

Credit Strategy and Portfolio Changes

Despite the macro noise, Asian dollar bonds performed well during the month. The India-US trade agreement in early February helped downplay tariff tensions. A less restrictive global monetary environment and steady credit fundamentals supported the resilience of Asia dollar bonds. During the month, Asia High Yield (HY) saw compression, with credit spreads tightening by 62bps, while Asia Investment Grade (IG) was largely unchanged.

We believe markets will look for cues from Warsh’s narrative to assess any changes in rate‑cut potential in 2H26. In the meantime, a dovish Fed focused on moderating inflation, and employment remains our base case assumption. That said, after three rate cuts in 2025, we believe the bar for additional easing is significantly higher given resilient economic conditions. This backdrop may keep short‑end yields modestly elevated in the near term, creating opportunities to lock in attractive carry. Markets are also likely to demand additional term premium further out the curve, given uncertainty around the Fed’s balance‑sheet outlook and the ongoing de‑dollarization theme, both of which present trading opportunities. Overall, we maintain a slight underweight in duration and a cautious stance toward higher UST yields.

We do not expect AI‑related investment spending and heavy bond issuance to pose major risks for Asia IG bonds, which have shown muted spread reactions. Both Oracle and Alphabet announced mega bond deals at attractive all‑in yields, and these were met with solid demand.

On the HY side, a broadly constructive market tone, together with limited bond supply, has supported increased refinancing opportunities for Asian corporates. We continue to focus our bond selection on issuers with demonstrated refinancing success, as these cases further strengthen overall credit quality. Lower onshore rates in China are also providing corporates with more diversified funding channels. We also note that Indian credits have increasingly skewed toward domestic refinancing, which has helped support technicals, although valuations appear relatively tight. Moody’s revision of Indonesia’s rating outlook to negative from stable reflects concerns around policy effectiveness rather than any deterioration in corporate fundamentals. We prefer Indonesia HY corporates, as we expect technicals for sovereign and quasi‑sovereign issuers to remain weak in the near term.

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