Marco Update

The FOMC delivered a 25bp cut to 3.5–3.75% in a split 9–3 decision, signaling growing concern over labor market softening even as inflation remains sticky. Fed projections outline a relatively optimistic outlook, with growth accelerating to 2.3%, unemployment holding at 4.4%, and core PCE easing to 2.5% in 2026. The U.S. Treasury curve steepened notably, with the 2–10 year spread widening to 69 bps at the end of December 2025 from 56 bps at the end of November (2025 average: 47 bps), accompanied by a weaker USD. Softer economic data, including weak payrolls and moderating inflation, reinforced expectations of further monetary easing and supported the front end of the curve, while the long end remained anchored by fiscal concerns and persistent inflation challenges.

In early January, additional softness emerged in the labor market, with non farm payrolls rising just 50k. However, the unemployment rate eased to 4.4% in December from 4.6% in November, the highest since September 2021. This suggested a still resilient economy and reduced the urgency for more front loaded cuts. The yield curve subsequently flattened, with the 2/10 spread narrowed to the lows at 61bps. Meanwhile, China’s annual Central Economic Work Conference signaled continued macroeconomic easing but with a more restrained tone than in 2024. While policymakers maintained an easing bias, they appeared less inclined toward broad based stimulus measures.

Credit Strategy and Portfolio Changes

Asian dollar bonds delivered a strong performance in 2025, supported by easing trade tensions, a less restrictive global monetary environment, and stable credit fundamentals. During the year, credit spreads tightened by 23bps in Asia Investment Grade (IG) and by 173bps in Asia High Yield (HY). We expect spreads to remain resilient in 2026 against a constructive macro backdrop, including ongoing U.S. monetary easing and a stable growth outlook in Asia. A gradual easing cycle should continue to support demand for income seeking assets.

We previously expected the Fed to pause briefly in early 2026 after three rate cuts in 2025, as we believe the bar for additional cuts is now higher given resilient economic conditions. Such a pause may push short end yields modestly higher in the near term, creating opportunities to lock in elevated yields. We maintain our preference for the mid part of the curve as core holdings, while selectively seeking opportunities at the long end, which remains anchored by uncertainties surrounding Fed independence, fiscal dynamics, and inflation concerns.

The change of Fed Chair and uncertainty around the pace of rate cuts will likely drive market volatility. We assume the incoming Chair will be at least as dovish as Chair Powell. Markets have now priced in roughly 47bps of rate cuts. Given moderating inflation and a labor market that is no longer showing strong momentum, this assumption appears broadly reasonable.

U.S. growth in 2026 will likely be driven by fiscal stimulus and AI related spending. However, markets may be overly optimistic about near term AI driven productivity gains, creating the risk of volatility if earnings disappoint. A significant hyperscaler bond supply is expected in 2026, potentially affecting U.S. IG technicals. Nevertheless, major U.S. tech firms maintain strong balance sheets, providing a substantial buffer before higher leverage materially affects credit fundamentals. As a result, we expect limited spillover to Asia IG.

Credit selection remains key for Asia HY. We expect Asian HY corporates to exhibit stable to improving fundamentals, supported by steady economic growth and reduced refinancing risks. Combined with continued sector diversification, these factors should help support valuations.

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