Marco Update

The US economy continued to show resilient growth, with Q2 GDP revised upward to 3.3%. Industrial activity remained robust, as indicated by the S&P Global Manufacturing PMI rising to 53.0 from 49.8 in July. Inflation data for July were mixed: while the CPI posted only modest gains, the PPI surged unexpectedly by 0.9% month-on-month, reflecting price pressures driven by the implementation of tariffs. Meanwhile, the August jobs report revealed further signs of labor market weakness, with nonfarm payrolls increasing by just 22,000, well below the expected 75,000, and following major downward revisions for May and June. The persistently weak labor data contributed to a decline in US Treasury (UST) yields to 4%, down from 4.2 – 4.3% earlier in the month. This reinforced expectations of a 25bp rate cut at September’s FOMC meeting, despite inflation risks remaining tilted to the upside. Overall, we believe concerns over stagflation in the U.S. continue to linger.

In China, August macro data largely met market expectations, although credit loan growth remained soft. The government’s policy focus on “anti-involution” is expected to continue, aiming to curb excessive low-price competition and ease deflationary pressures in producer prices. Domestic supply-demand imbalances persist, and further front-loaded fiscal support is anticipated. The 5-year loan prime rate, a benchmark for mortgage lending, was left unchanged at 3.5%, reflecting a cautious policy stance amid subdued domestic demand.

Credit Strategy and Portfolio Changes

Asia dollar bonds demonstrated resilience, underpinned by growing rate cut expectations and a broadly risk- on global backdrop. Asia Investment Grade (IG) spreads were largely stable at 129bps, while High Yield (HY) spreads tightened by 18bps to 539bps, reflecting improved investor sentiment.

The Fed delivered a 25bp rate cut in September, citing downside risks to employment, an outcome that aligned with market expectations. While labour market weakness may support an additional two rate cuts in the near term, inflationary pressures stemming from tariffs could limit some scope for more easing, despite market hopes. Meanwhile, US fiscal expansion and uncertainly surrounding Fed leadership are likely to exert some upward pressure on long-end UST yields.

At the regional level, the removal of Indonesia’s Finance Minister raised concerns about fiscal discipline. In response, Indonesia IG bond spreads widened modestly but partially recovered thereafter. The newly appointed Finance Minister sought to reassure markets by reaffirming the country’s commitment to the 3% fiscal deficit cap. We are adopting a wait-and-see approach to assess the credibility of the new minister’s fiscal stance.

All-in yields for IG bonds remain attractive despite the anticipated rate cut. We took advantage of the rally in UST to trim bond holdings and remain cautious about extending duration toward the long end, as stated above. While we expect limited credit spread compression in our Asia HY portfolio, valuations remain supported by constrained new issuance, low direct tariff exposure, and improved sector diversification. We selectively took profit on high-dollar-price or lower-yielding bonds.

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