Macro Update

US macro conditions in May were shaped by geopolitical developments, inflation dynamics, and policy expectations. US Treasury yields moved higher and the curve bear-flattened, with the 2s10s spread narrowing by 7 bps to 43 bps as elevated energy prices fueled inflation concerns. Towards the month-end, rates partially retraced on expectations of a potential US‑Iran agreement, which eased near-term oil price pressures.

Inflation signals were mixed. CPI and PPI surprised to the upside, largely driven by higher energy costs, while PCE softened unexpectedly, reinforcing expectations that the Fed is likely to remain on hold in the near term. Meanwhile, the US labor market remained resilient, with stronger-than-expected payroll growth alongside softer wage gains, pointing to gradual underlying cooling.

In China, May data suggest stabilising but still fragile growth, with PMI hovering around the expansionary threshold as manufacturing momentum softens and domestic demand remains weak. This backdrop implies that monetary policy is likely to remain broadly accommodative, with a continued focus on targeted support rather than broad-based stimulus.

Credit Strategy and Portfolio Changes

Asia credit markets in May extended a constructive tone, delivering further spread tightening and positive returns across both Investment Grade (IG) and High Yield (HY) segments despite a more volatile macro backdrop. Credit spreads tightened by 9bps in IG and 32bps in HY, supported by sustained risk-on sentiment and strong demand for carry. While geopolitical uncertainty persisted, market technicals and investor demand helped underpin performance across the region.

Within Asia IG, credit extended its steady positive momentum from April, with performance led by BBB-rated bonds, supported by gains in select higher beta names. AA/A-rated bonds also tightened by around 7bps, with broad-based strength across sectors, including China TMT. Across sectors, financials and corporates outperformed sovereigns and quasi-sovereigns, reflecting lingering concerns in certain markets, notably Indonesia. Our exposure to Indonesia remains focused on shorter-dated, high-quality issuers, where we believe credit fundamentals are unlikely to be materially impacted. Bond prices have remained broadly stable.

Along the curve, the long end delivered stronger total returns, as spread tightening more than offset the relatively stable UST yields during the month. While we remain mindful of the risk of rising global sovereign yields amid persistent inflation pressures, we believe the impact of higher debt servicing costs on Asia IG issuers should remain manageable, supported by their generally strong credit fundamentals and resilient balance sheets.

The bond market has increasingly priced in the risk of further US rate hikes, with front-end yields repricing higher and the curve flattening. Real yields have also risen, reflecting expectations that the Fed may need to maintain a higher-for-longer policy stance amid persistent inflation pressures. Current market pricing already embeds a meaningful probability of additional tightening, raising the bar for further repricing absent a material reacceleration in inflation. Against this backdrop of potentially higher rate volatility, we maintain a conservative stance and remain underweight duration.

Asia HY credit delivered strong performance, with B-rated bonds leading the rally and outperforming BBs. Frontier sovereigns – including Sri Lanka, Pakistan, and Mongolia – saw meaningful spread compression, recouping more than the losses recorded in March. China, Macau, and Hong Kong HY also rebounded from their March troughs. In contrast, Indonesia lagged, weighed down by concerns over potential sovereign rating downgrade pressure.

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

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