Marco Update

The month was marked by heightened volatility driven by surprise US tariff announcements, mixed economic data, and evolving central bank policies. Markets initially reacted negatively to the tariffs but found relief as delays on Mexico and Canada tariffs eased immediate concerns, though additional threats on steel, aluminum, autos, chips, and pharmaceuticals kept uncertainty elevated.

US inflation remained a focal point, as Core PCE rose 2.6% YoY in January and eased from that of December, in line with consensus. US GDP growth in 4Q24 missed estimates at 2.3% and jobless claims remained strong. Lower inflation prints and softer economic data have pushed the 10-year UST yield lower by 33bps to land at 4.2% as of end of February. Risk assets saw volatility, particularly in tech stocks due to AI- driven headlines, though broader market impact remained contained, with the S&P 500 down by 1.4% for the month.

Globally, Euro area inflation surprised to the upside, but weak manufacturing data reinforced expectations of ECB rate cuts, while the Bank of England delivered a 25bps rate cut to 4.50%. Trade policy remained a key market driver, with reciprocal US tariff reviews expected by April and new 25% tariffs on key deficit sectors raising concerns over potential retaliatory measures, particularly from the EU. Looking ahead, inflation trends, central bank policy shifts, and tariff developments will remain key drivers of market direction, as global economies navigate a fragile balance between economic resilience and policy normalization.

Primary USD Bond Issuance

The pace of supply has slowed, standing at USD2.3bn (USD29.6bn YTD) in EM Asia, and USD6.7bn (USD19bn YTD) in Australia and Japan. This is especially notable, given that roughly USD37bn has been returned to investors in terms of coupons, maturities, and buybacks YTD. The low supply has provided a robust technical backdrop for Asia credit likely underpinning the 10bp of tightening YTD.

Credit Strategy and Portfolio Change

Asia credit spreads tightened for the month despite US rates rallying and tariff-related headlines. Credit spreads of both Asia Investment Grade (IG) and Asia High Yield (HY) bonds tightened by 5bps and 35bps, respectively. Generally, we have been avoiding tariff-exposed Asian segments like Japanese autos, consumer goods or companies having higher revenue or export share to the US.

Asia IG: Given the expected higher volatility in UST rates, we have kept duration largely neutral versus the benchmark. We have participated in Asia IG primary issuance to take advantage of the new issue premium. We took profit on longer-dated bonds after rates moved, added banks, and reduced HY energy. Overall, we stick with Asian financials, Japanese lifers, and Indonesian quasi issuers on attractive high all-in yield at 5-6% and good credit quality.

Asia HY: We continue to look for credit spread to widen modestly on slower growth, despite most Asian countries’ growth momentum remaining solid and Asian Central Banks having commenced their easing cycles. That said, decent bond carry provides downside protection in a slowing growth environment. We believe any correction shall pose buying opportunities. Our themes on credit selection stay with those issuers demonstrating their ability to improve their credit profiles via earnings growth, deleveraging, and better visibility on refinancing capability. We are constructive on selective Hong Kong, China, and India HY, and neutral on Macau gaming. We trimmed some energy and real estate exposure and added some bank papers during the month.

Latest Market Development:

Trade Policy & Tariffs
Trade policy remained a source of uncertainty as President Trump moved forward with additional tariffs on China, Canada, and Mexico. China saw another 10pp tariff increase, bringing its effective tariff rate to 34%, while tariffs on Canada and Mexico (25% and 10% on Canadian energy, respectively) remain uncertain after past delays. While these trade actions introduced volatility, markets have largely shifted their focus away from tariffs as an immediate shock, instead treating them as a longer-term structural risk.

A bigger concern is potential EU retaliation, particularly in autos and agriculture, as European leaders consider countermeasures. Despite these uncertainties, investors are increasingly weighing broader economic and policy factors rather than reacting sharply to each tariff headline.

China’s “Two Sessions” Meeting
The meeting reaffirmed a pro-growth stance, setting its GDP target at around 5% for 2025 and raising the official fiscal deficit target to 4% of GDP, signaling a stronger fiscal expansion to stabilize growth. Key policy priorities include boosting domestic consumption, increasing AI-related investments, and stabilizing the property sector, as authorities seek to counteract economic headwinds.

The PBOC remains in easing mode, with policymakers focusing on liquidity support and pro-growth measures, though they must balance these policies against financial stability risks, particularly in foreign exchange markets. While China’s fiscal policies are expected to provide near-term economic support, markets remain attentive to the effectiveness of these measures and how they may impact global trade and investment flows.

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