Marco Update

Growing signs of a meaningful slowdown in the U.S. labor market have increasingly played a decisive role in shaping monetary policy. Although the official job report for September was delayed due to the federal government shutdown, data from August pointed to weakening labor market conditions.

As expected, the Federal Reserve delivered a 25bps rate cut in mid-September, lowering the federal funds target range to 4.00%–4.25%. During the month, the yield curve had flattened ahead of the rate cut, as the short end of the curve priced in an easing bias. Meanwhile, the long end of the curve remained anchored, reflecting market skepticism over the U.S. fiscal outlook. Following the rate cut, stronger-than-expected macro data, including a 20.5% surge in new home sales, an upward revision of Q2 GDP to 3.8%, and a modest rebound in core PCE inflation, contributed to a steepening of the curve.

Credit Strategy and Portfolio Changes

Expectations of further U.S. rate cuts and China’s steady fiscal stance provided a constructive backdrop for Asian credit, which delivered another month of positive returns in September. Asia Investment Grade (IG) and High Yield (HY) credit spreads tightened by 11bps and 36bps, respectively, supported by easing trade tensions and strong market technicals.

So far, the U.S. government shutdown has had minimal impact on the bond market, with investors broadly assuming it will be resolved. In our view, a prolonged shutdown could weigh on Q4 GDP growth and potentially drag 10-year UST yields lower.

Bond markets continue to rally on expectations of further rate cuts. We view the September cut as a “risk-management cut,” reflecting a cautious stance rather than a pivot toward aggressive easing. The market continues to price in a high probability of a 25bps cut in October and another in December. In the medium term, any deviation from expected inflation trends could shift the policy trajectory and affect expectations for the rate cut path.

While the scope for further spread compression may be limited, we do not anticipate significant widening, given the absence of immediate recession risks in the U.S. That said, we believe global markets are likely to remain volatile amid persistent U.S. fiscal concerns and renewed discussions of trade tensions between the U.S. and China.

For Asia IG bonds, we have increased our cash position to seek better entry levels, anticipating some moderation in risk appetite toward year-end. For Asia HY bonds, we selectively took profits on high-dollar-price bonds, given tight spread levels, and are looking to redeploy capital with a more defensive tilt.

^{Source: Value Partners, Bloomberg, MSCI, as at 30 September 2025.
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