Marco Update

In October, the Fed delivered a second consecutive 25bp rate cut at the FOMC as data pointed to a cooling labor market. A December rate cut is not assured based on Powell’s remarks; markets initially reacted with a stronger dollar and higher U.S. Treasury (UST) yields, with the 10-year yield widening by 16bps given the hawkish tone. The federal government shutdown created a data vacuum, and with its resolution, markets are expected to refocus on U.S. fiscal health. Separately, there is a growing probability that the U.S. Supreme Court will strike down tariffs, with a decision potentially coming early next year. This could return cash to corporates and renew concerns about the government deficit, although President Trump may still use other legal authorities to maintain similar trade effects, suggesting any impact could be temporary.

China’s exports unexpectedly contracted by -1.1% y/y in October, reversing September’s strong growth trend. The slowdown was broad-based across the EU, Japan, Korea, Taiwan, and ASEAN, while shipments to the U.S. remained weak. Imports also fell sharply, led by base metals, signaling softer domestic demand. Although the trade surplus is still on track to reach a record level, a sustained slowdown in export could amplify China’s economic challenges, alongside property sector weakness and subdued private consumption.

Credit Strategy and Portfolio Changes

Asia credit exhibited resilient performance, supported by spread compression and slightly lower UST yields. Expectations of further U.S. rate cuts and a steady growth outlook in Asia have provided a constructive backdrop. Asia Investment Grade (IG) and High Yield (HY) credit spreads tightened by 4bps and 22bps, respectively, during the month. Despite tight spreads, we believe they should remain well supported into year-end and 2026 on easing trade tensions, lower US rates, reduced default risk, and strong market technicals.

With the U.S. shutdown, downside risks to 4Q GDP remain. A cooling labor market makes further rate cuts likely, with 45% priced into the forward curve. If a December cut materializes, we expect the Fed to pause briefly in early 2026 after delivering three cuts in 2025. This may lift short-end yields, presenting investment opportunities. With further easing likely in 2026, we believe the belly of the curve remains attractive, balancing short-term yield declines with long-end yields anchored by renewed fiscal and inflation concerns.

China’s 15th Five-Year Plan proposal emphasizes high-quality growth sectors, including technology, innovation, and structural consumption support. Additionally, curbs on excess capacity and “anti-involution” policies should keep demand-supply dynamics more balanced. We believe the government is moving in the right direction to address entrenched deflation and slower growth. As growth drag diminishes, this should help support overall sentiment in Asia credits.

During the month, we increased cash levels in the Asia IG segment to seek better entry points as we anticipate some moderation in risk appetite toward year-end. For Asia HY bonds, we selectively trimmed high-dollar-price bonds and plan to redeploy capital into new issues offering better concessions.

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