10Y US Treasury (UST) yields declined from the peak of 4.8% in mid-January to about 4.25% at the time this was written. This retraces the earlier rise in 10Y UST yields since 4Q24. Throughout December 2024, 10Y UST yields rose even as the Citi US Economic Surprise Index fell and slipped into negative territory at the end of December - which means that data releases were worse than expected. At that time, the market was more concerned over the uncertainty of the fiscal trajectory under Trump 2.0, which drove UST yields higher as this was deemed necessary to meet the higher issuance needs. Since then, the index has moved deeper into negative territory, following the recent sharp drop in US consumer confidence. This could be attributed to the looming threat of incremental tariffs and the escalation of trade war fears which has influenced corporate and consumer behaviour.

Tariffs will hurt sentiment and growth, driving down yields on long-end UST yields in the near term. However, we think concerns of fiscal slippage could once again be a big driver of UST yields in the later part of this year. Despite recent comments by US Treasury Secretary Bessent, we think the US Treasury needs to boost supply by early 2026 due to the funding gap. Higher UST supply could drive yields higher along the long end of the curve.

In addition, the futures market has increased the chance of the Federal Reserve (Fed) reducing rates quite sharply by end-2025. However, with inflation still above Fed’s target and as Trump’s policies on tariffs and looser fiscal stance are inflationary, the Fed is unlikely to cut rates aggressively unless the job market weakens meaningfully. We expect one more cut of 25 basis points for this year.

We hold a cautious view on USTs especially after the recent moves. We remain cautious on duration risk and regard the front and intermediate term maturities as offering the best protection from rates volatility.

Developed markets

The US administration has announced tariffs on steel and aluminium imports and threatened tariffs on other products from the EU. Tariffs would harm European manufacturers since their products becoming more expensive in the US, would likely lead to declining export revenues. Furthermore, US tariffs on other parts of the world could also pressure European companies since the targeted countries could find that their products are too expensive to sell in the US and redirect their products to Europe, creating competition for domestic manufacturers.

European credit spreads have held up well despite the risks posed by tariffs - the ICE BAML Euro Investment Grade Corporate Index has an option-adjusted spread (OAS) of 88bps and the ICE BAML Euro High Yield Index has an OAS of 280bps, at the time this was written. Both are near historical tights. However, we think that exposure to tariffs will be an important determinant of relative spreads and credit valuations this year.

Sectors targeted by tariffs will be most exposed, with the five largest US trading partners within the EU – Germany, Italy, Ireland, France and the Netherlands – likely to be most affected by US tariffs.

In Germany, while we still see an uncertain path ahead as we await the outcome of prevailing coalition talks, we do not see major fiscal risks arising from the outcome of the recent elections, since cross-party consensus on the need for fiscal prudence will likely be high.

Emerging markets

With a wide range of variables and uncertainties in 2025, we remain Neutral on Emerging Market (EM) credits. A stronger US Dollar (USD) and tariffs should translate into wider EM spreads over the next 12 months, but strong technical factors are important offsetting considerations.

Asia

Asian credit markets have remained resilient overall, despite constant headlines on tariffs. Although we stay cautious on the back of tight credit spreads - uncertainty in trade policy and rates volatility, healthy issuer fundamentals and supportive market technicals continue to remain key mitigating factors.

As we approach key dates relating to the America First Trade Policy review and the possible expansion of tariff scope into more sectors, we expect volatility to pick up going into April. A broadening of the tariff scope into reciprocal tariffs and non-tariff barriers such as VAT, subsidies and anti-dumping measures could increase complexity and impact more Asian countries.

The rally in USTs has helped to sustain the performance of Asia IG, particularly the long duration segments, despite slight spread widening in the latter during the month.

Sentiment in China HY was supported by signs of stabilisation in the property markets of Tier 1 and strong Tier 2 cities. Better earnings, gross gaming revenue recovery and market sentiment have also lifted the Macau gaming sector. A continuation of accommodative fiscal and monetary policy, as was clear from China’s National People’s Congress (NPC) in March, should support China’s growth prospects.