Macro Update

June was characterized by resilient U.S. economic and labor market data, reinforcing expectations that the Federal Reserve will keep monetary policy restrictive for longer. Labor market indicators, including JOLTS job openings, ADP employment, and nonfarm payrolls, continued to point to a healthy labor market, while broader economic activity remained firm.

Inflation signals were mixed. Core CPI came in slightly softer than expected, although headline inflation remained supported by higher energy prices and producer prices surprised to the upside. Against this backdrop, the June FOMC meeting struck a more hawkish tone, with policymakers raising their projections for future policy rates and emphasizing persistent inflation risks. This led U.S. Treasury (UST) yields higher and further flattened the yield curve, with the 2s10s spread narrowing by 14bps to 29bps.

Later in the month, however, an interim U.S.-Iran peace agreement eased concerns over potential oil supply disruptions, pushing oil prices back toward pre-conflict levels in the low USD70/bbl range. Together with relatively benign core PCE data, this supported a rally in U.S. Treasuries and improved market risk sentiment heading into month-end.

Credit Strategy and Portfolio Changes

Asian credit markets remained resilient despite heightened rate volatility. Both Investment Grade (IG) and High Yield (HY) bonds delivered positive returns during the month. IG performance benefited from lower UST yields toward month-end despite modest spread widening, while HY continued to outperform, supported by investors’ ongoing search for yield.

Markets have largely priced in a “higher-for-longer” Fed policy trajectory, driving front-end UST yields higher and flattening the yield curve. The rise in real yields to 2.3% reflects investor expectations that restrictive monetary policy may need to remain in place for an extended period, given sticky inflation and resilient economic growth. We believe current market pricing already reflects a relatively high probability of further policy tightening, which should reduce the risk of a significant near-term repricing unless inflation surprises materially to the upside. Taking advantage of the decline in UST yields toward month-end, we proactively reduced duration exposure in our IG portfolios.

IG credit spreads widened modestly by 7bps in June, partially reversing the tightening observed over the previous two months. BBB-rated and longer-duration bonds underperformed. Selected Taiwanese insurers, Southeast Asian corporates, and Indonesian quasi-sovereigns lagged, while higher-quality A/AA-rated issuers, particularly Korean quasi-sovereigns and selected Chinese financial institutions, proved more resilient amid the volatile rates environment.

HY credit continued to outperform in June, supported by a further 13bps tightening in spreads. Performance was led by frontier sovereigns, particularly Pakistan and Sri Lanka, which benefited from lower oil prices and an improving macroeconomic outlook. Hong Kong property credits also performed well, supported by news of potential equity fundraising initiatives. Portfolio positioning remained largely unchanged during the month.

^{Value Partners, Bloomberg, Morningstar as at 30 June 2026. Performance in USD.}

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