Macro Update

Market volatility moderated in August following July’s sharp US Treasury (UST) sell-off. However, concerns surrounding fiscal deficits, elevated government borrowing requirements, and expectations of further debt issuance to fund ongoing US AI-related capital expenditure continued to weigh on sentiment.

Inflation and growth data delivered mixed signals during the month. Softer payroll, CPI and PPI readings in early August reduced expectations for further Fed tightening and supported a rally in front-end USTs. Easing Middle East tensions and lower oil prices also improved overall risk sentiment.

Mid-month, USTs received additional support after Scott Bessent announced an expansion of the Treasury buyback programme, increasing longer-dated bond repurchases to as much as US$6bn from US$2bn. While the announcement helped alleviate some concerns regarding long-end UST supply, the impact proved temporary.

Later in the month, stronger-than-expected core PCE inflation, weak Treasury auction demand and ongoing fiscal concerns reignited higher-for-longer rate expectations. Hawkish remarks from Kevin Warsh at the Jackson Hole Economic Symposium further pressured rates and lifted expectations of additional policy tightening. As a result, the UST curve bear-flattened over the month, with 2-year and 10-year Treasury yields rising by 5bps and 2bps, respectively, to 4.34% and 4.75%.

Looking ahead, elevated oil prices continue to cloud the inflation outlook and remain a near-term headwind for rates. While a significant portion of further policy-tightening expectations is priced into front-end yields, persistent energy-driven inflation and concerns over fiscal financing requirements could keep UST yields elevated in the near term.

Credit Strategy and Portfolio Changes

Despite increasing market focus on rising US fiscal deficits and heavy debt issuance, US investment-grade (IG) issuance remained exceptionally strong. During August, US IG issuance reached US$163bn, up from US$140bn in July, reflecting continued funding demand from technology and communications issuers amid elevated AI-related investment and capital expenditure requirements. Overall US IG yields reached an attractive 5.49% at month-end, while spreads remained broadly stable at 78bps. In our view, this continues to create selective opportunities in high-quality IG and technology issuers. Meanwhile, we prefer the shorter end of the curve, where we believe the majority of rate hike risk has already been priced in. Given our expectation for continued US rates volatility, we maintain a broadly neutral duration position across our IG portfolios.

Asian credit also delivered solid performance in August, with spreads tightening by 8bps to 111bps at month-end, supported by high credit quality and healthy corporate fundamentals. APAC primary markets remained active, with issuance reaching US$18bn in August, compared with US$16bn in July, led by Indian banks and Japanese corporates.

Regionally, Indian banks raised more than US$5bn through offshore bond markets during the RBI funding window in order to front-load dollar funding. Most new issues tightened after pricing, reflecting strong investor demand. Meanwhile, Chinese credit lagged regional peers amid a weaker macroeconomic backdrop and the introduction of policies aimed at phasing out the pre-sale model in the property sector. We view this as modestly credit negative given the longer working capital cycle it may create for developers. Indonesian sovereign and quasi-sovereign credits outperformed and recovered July losses after the nomination of the new Bank Indonesia governor reinforced expectations for policy continuity and macroeconomic stability. Japanese issuers remained a major source of regional primary supply and continued to offer attractive spread pick-up versus comparable US IG credits.

Asia high-yield (HY) credit delivered a robust performance in August, with spreads tightening by 19bps and yields kept at 8.0% at month-end. The asset class remained relatively insulated from the regional bond supply overhang. Performance was supported by frontier sovereigns, particularly Sri Lanka, as well as commodity-related credits that benefited from firmer commodity prices. We continue to focus on credit selection and favour selective opportunities in Hong Kong, China, and Mongolia, alongside lower-beta Macau gaming credits.

^{Value Partners, Bloomberg, Morningstar as at 31 August 2026. Performance in USD.}

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