Marco Update

June opened with heightened trade tensions in the Middle East, and soft economic data in the US reset expectations of an earlier Fed rate cut. Oil prices surged initially due to geopolitical risks, but rapid de-escalation and limited spillover effects helped ease inflation concerns. The FOMC kept rates unchanged at 4.25-4.5% but flagged risks from prolonged tariff pass-through, with Chair Powell cautious of persistent inflation effects. Fiscal policy uncertainty, following the passage of the ‘One Big Beautiful Bill’ on July 3, along with ongoing global tariff negotiations, added further complexity to the macro outlook. Both 5-year and 10-year US Treasury (UST) yields tightened by 17bps month-on-month, ending at 3.8% and 4.2%, respectively, driven by softening data in US.

Credit Strategy and Portfolio Changes

Credit spreads remained broadly stable throughout the month, despite geopolitical tensions. Asia Investment Grade (IG) spreads held steady at 142bps, while Asia High Yield (HY) spreads widened modestly by 20bps to 587bps. The decline in UST yields helped offset the impact, supporting overall performance.

US inflation remains a key focus, as it could diverge from current expectations for the rate cut trajectory. The futures market is pricing in one to two cuts in the second half of 2025. In the near term, inflation surprises are likely to be more influential than employment data, especially as the effects of ongoing tariff negotiations and trade disruptions have yet to fully play out.

We maintain our view that the 10-year UST yield will remain range-bound between 4.2% and 4.5%, while staying alert to developments in US debt dynamics and inflation trends. US economic data is expected to continue showing signs of deceleration until tariff-related risks are more clearly understood.

We are also closely monitoring Japanese Government Bond (JGB) yields ahead of the Upper House election on July 20. The JGB curve has steepened significantly due to weak demand in the super-long end and growing concerns over Japan’s fiscal outlook. A major fiscal expansion under a new government – though not currently the consensus – could push JGB yields higher and introduce additional volatility to the UST market.

Given the likelihood of persistent geopolitical and trade policy uncertainty into the second half of 2025, we remain vigilant in our strategy to navigate elevated market volatility. Asian dollar bonds continue to demonstrate resilience, supported by diversified sector and regional exposure, as well as improving fundamentals among issuers that are relatively insulated from direct tariff impacts.

We emphasize credit selection in the HY space and favor defensive sectors such as financials, utilities, and gaming, which offer stable cash flows. As part of our broader risk management strategy, we have trimmed exposure to certain Hong Kong credits to enhance portfolio resilience and flexibility. On the IG side, we believe the belly part of the curve remains the sweet spot, offering attractive all-in yields. We maintain a neutral stance on duration as tariff and inflation risks are not fully priced.

^{Source: Value Partners, Bloomberg, MSCI, as at 11 July 2025.
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

^{Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.}

^{This article has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.}