Marco Update

In May, global markets experienced a rollercoaster ride as trade tensions between the US and China eased, only to be offset by renewed fiscal uncertainties in the US. The month began with cautious optimism following the announcement of a temporary 90-day reduction in bilateral tariffs, which sparked a broad market rally.

This positive sentiment was further supported by stronger-than-expected U.S. economic data, including an improved ISM Services reading and a resilient labor market, with the unemployment rate steady at 4.2%. However, retail sales and the Producer Price Index hinted at softening demand. Mid-month, sentiment shifted as Moody’s downgraded the US credit rating to Aa1, citing concerns over extended tax cuts and a rising national debt burden. This downgrade pushed 30-year Treasury yields above 5% for the first time since 2023.

Credit Strategy and Portfolio Changes

Markets have gradually moved past the US tariff narrative, supported by ongoing negotiations and a repricing of recession risks. As a result, spread valuations have recovered to pre-Liberation Day levels, with Asia high-yield (HY) spreads tightening more due to the limited direct exposure of issuers to tariff shocks and continued demand for yield. Asia Investment Grade (IG) and HY benchmark bonds tightened by 18bps and 56bps, respectively, to 142bps and 567bps. Meanwhile, the 5-year US Treasury yield rose by 23bps during the period, partially offsetting the tightening spreads. Currently, benchmark yields for Asia IG and HY bonds stand at 5.3% and 9.3%, respectively.

While concerns about economic growth have somewhat subsided, market narratives have shifted toward fiscal sustainability and supply-demand imbalances. The potential passage of the “One Big Beautiful Bill Act” and the scheduled end of the 90-day US-China tariff pause around mid-August could reprice fiscal and growth risks in the US. Although inflation has remained under control thus far, the trade-induced effects have yet to fully materialize. Drawing from the 2018–2019 trade war experience, there is a possibility that inflation could trend higher in 3Q 2025, as peak tariff effects typically take two to four months to emerge.

We continue to adopt a nimble strategy in Asian dollar bonds in light of rising macroeconomic uncertainties. This approach is supported by a reduced probability of a US recession, and stabilizing fundamentals among Asian issuers that are relatively insulated from direct tariff risks. We favor sectors such as financials, utilities, and gaming, which offer defensive characteristics and stable cash flows, along with selective opportunities in Hong Kong HY corporates.

The all-in yield remains attractive for Asia IG bonds, particularly in the 5 to 7-year segment of the curve. We expect the 10-year US Treasury yield to remain range-bound between 4.2% and 4.5%. We remain mindful of both US debt dynamics and inflation trends. Hard data from the US, including employment and GDP figures, will likely show a gradual slowdown as corporates delay hiring decisions until tariff risks are better understood.

In our Asia HY portfolio, valuations are supported by limited new issuance, lower default rates, and improved sector diversification. Sentiment in Hong Kong corporate HY bonds is expected to be aided by a declining HIBOR trend and the potential resolution of refinancing challenges for a major Hong Kong property developer. These factors should help lift overall sentiment in the HY segment.

^{Source: Value Partners, Bloomberg, MSCI, as at 31 May 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.}

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