Macro Update

US Treasuries sold off sharply during the month as a hawkish Fed, persistent fiscal concerns, and escalating geopolitical tensions in the Middle East drove yields higher. Concerns over potential energy supply disruptions briefly pushed oil prices above US$108/bbl before stabilizing around US$100/bbl toward month-end.

The Fed delivered a widely expected 25bp rate hike, bringing the policy rate to 3.75%-4.00%, while maintaining a cautious stance toward inflation risks. The 2-year and 10-year Treasury yields rose 55bps and 54bps, respectively. Markets continue to price in a higher-for-longer interest rate environment amid resilient economic growth, sticky services inflation and ongoing fiscal concerns.

US economic data continued to reflect a resilient economy, supported by a robust labour market, persistent inflationary pressures, and strong consumer spending, before month-end inflation data softened. Core PCE inflation remained contained at 0.2% MoM in August, bringing the annual rate down to 3.0% and reinforcing expectations that the Fed may pause at its October meeting.

Within Asia, China’s manufacturing PMI returned to expansion territory in September, while ample liquidity continued to support Chinese government bonds. The 10-year China government bond yield remained broadly stable at 1.68% before declining to approximately 1.62% currently, driven by expectations of further domestic monetary easing. As a result, Chinese government bonds were among the best-performing fixed income assets despite heightened volatility across global bond markets.

Credit Strategy and Portfolio Changes

Asian credit spreads were largely unchanged during the month despite significant volatility across global sovereign bond markets and continued to outperform their US counterparts.

Market focus will be on the US midterm elections on 3-4 November and the US Treasury’s Quarterly Refunding Announcement. We believe these factors are likely to contribute to heightened market volatility in the coming months. Accordingly, we continue to maintain a cautious stance on duration and a broadly neutral duration profile across our portfolios. Our preference remains concentrated in the short-to-intermediate segment of the curve, where much of the risk of additional rate hikes appears already priced in. Meanwhile, we have selectively increased exposure to RMB-denominated bonds, which we believe should remain relatively defensive in the current environment.

The prevailing market base case anticipates a divided Congress, with Republicans and Democrats each controlling one chamber of Congress. Under such a scenario, the outlook for US interest rates would likely remain primarily driven by economic growth, inflation, and the path of monetary policy.

US Investment Grade (IG) issuance totalled US$207bn in September (+27% MoM), with financial issuers accounting for 61% of total issuance. US IG yields reached an attractive 6.0%, while spreads widened modestly by 2bps to 80bps. We continue to see selective opportunities in high-quality US IG issuers, particularly within the technology sector. US High Yield (HY) spreads widened more meaningfully to 311bps (+50bps), reflecting risk-off sentiment and a flight to quality.

Asian credit markets continued to compare favourably with the US. Asian IG and HY spreads ended the month at 111bps and 329bps, respectively. Primary market activity remained robust, with APAC IG issuance reaching US$28bn in September (+56% MoM), led by Japanese and Australian financial institutions, while HY issuance also increased, driven by SoftBank and Pakistan transactions.

Within IG, Southeast Asian sovereigns underperformed with the Philippines and Indonesia underperforming amid higher oil prices and broader risk-off sentiment. Asian financials like Taiwanese and Chinese lifers subordinated bonds, Indian banks relatively underperformed on secondary. China LGFV outperformed.

We continue to favour shorter-duration Asia HY bonds while selectively cherry-picking opportunities where strong carry can help offset potential spread widening. Segment performance was supported by selected frontier sovereigns and resilient credit fundamentals. We remain constructive on Asia HY, as default risks continue to appear materially lower than in prior cycles, underpinned by healthier balance sheets, lower leverage, and improved refinancing conditions.

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

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