【Bond Trends】Citi experts recommend buying US short-term Treasury bonds due to attractive yields; Chinese financial experts are optimistic about RMB bonds.

			▲ Rate hikes once sent global bonds into a sharp drop

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U.S.-Iran war sparks an energy crisis and adds to uncertainty about where U.S. interest rates will go. With the market worried that the Fed will pivot back to rate hikes in the fourth quarter, experts advise that in the second quarter, flexible, diversified strategies combining equities and bonds should be used to help withstand market turbulence. Citigroup’s experts believe U.S. short-term Treasuries are attractive and are worth picking up when prices are low. As high oil prices put Asia in the crosshairs, experts from both China and overseas urge that there’s no need to take a one-size-fits-all approach to avoiding Asian bonds—instead, certain regional bonds such as those in China have defensive qualities.

Last year’s best-performing emerging-market U.S. dollar high-yield bonds delivered total returns of 13.9%, and Asian U.S. dollar high-yield bonds also rose by 9.5%. Yet now they are being hit hard by the spillover effects stemming from the U.S. and Israel’s actions against Iran.

Citi Bank’s head of investment strategy and asset allocation, Liao Jiahao, said that short-term U.S. Treasury yields are already at attractive levels, and when market volatility heats up, Treasuries face significantly lower pressure from any degree of credit deterioration and downside risk. The current yield environment provides investors with an opportunity to strengthen the resilience of their portfolios. Within a fixed-income portfolio, adding more short-dated U.S. Treasuries allows investors to strike a better balance among income, capital preservation, and asset flexibility in a changing macro environment full of uncertainty.

Citi expert Liao Jiahao urges increasing allocations to U.S. short-dated debt in fixed portfolios

Liao Jiahao added that emerging-market bonds, over a full economic cycle, are still a viable diversification tool; however, he believes the current environment is less favorable, more sensitive to the economic cycle, and dependent on external financing. This includes emerging-market fixed-income assets that are more likely to be affected by a stronger U.S. dollar, fluctuations in fund flows, and shifts in global risk sentiment.

Zhang Haoren, head of personal and business banking investments at China CITIC Bank (International), said that market concerns about the Fed “turning back to rate hikes” are unfavorable for the bond market, mainly because the Middle East conflict pushes up oil prices, while also disrupting shipping along the Strait of Hormuz and disturbing the normal operation of global trade.

Zhang Haoren said that if this is a long-term issue, it would create significant pressure on global inflation and even the overall economy. However, once conditions improve, rising inflation expectations will be “temporary,” not structural. The Fed may not easily “turn back to rate hikes” unless the U.S. labor market deteriorates noticeably and/or inflation remains out of control.

The market worries that U.S. rate hikes hurt the bond market; however, Trust Bank expects the Fed will have difficulty raising rates for now

However, near-term market sentiment unavoidably increases volatility in the bond market. Therefore, controlling the bond portfolio’s duration remains the top priority. The average duration could be considered between 2 and 5 years, which would reduce sensitivity to interest rates. At the same time, with overall bond yields currently rising, adding to the bond market can also lock in today’s high yields. Only after oil prices fall or the overall sentiment improves should investors gradually increase duration; selling all bonds blindly could instead mean missing out on income opportunities.

Against the backdrop of worries about an economic recession, it is necessary to appropriately diversify the categories in a bond portfolio and avoid being overly concentrated in lower-rated bonds. In addition to traditional government bonds and investment-grade bonds, exposure can also be diversified into MBS (mortgage-backed securities) and ABS (asset-backed securities).

CITIC’s expert Zhang Haoren believes bonds from China and Singapore/Malaysia have strong downside resilience

Regarding Asia being hit hard by high oil prices, will the Asian bonds that were favored last year be severely hurt—should they be avoided if possible? Zhang Haoren believes that Asian bonds performed well last year, mainly benefiting from easing monetary policies adopted by central banks across countries in the region, along with continued capital flowing back into Asian markets. But more recently, oil prices have risen significantly, putting some pressure on Asian bond markets.

Because most Asian economies are net oil importers, higher oil prices not only raise inflation pressure, but may also prompt some central banks to raise rates earlier or faster. In the short term, this brings downside risks to Asian bond prices.

Medium-term performance will depend on how long oil prices remain elevated and the response measures taken by governments and central banks. At present, there is no need to completely avoid Asian bonds. Instead, a selective reduction strategy can be adopted and rotated toward more defensive bond products. In particular, central banks in countries such as the Philippines, Thailand, and South Korea have a higher likelihood of hiking rates—investors are advised to temporarily avoid those bond markets. By contrast, bond markets in China, Singapore, and Malaysia have been more stable and are worth continuing to monitor.

Zhang Haoren expects that by end-2026, the U.S. 10-year Treasury yield will be around 4.2 to 4.5%. He also adjusted that the current bond portfolio position is not about replacing the whole portfolio with short-dated bonds; rather, it is about keeping the portfolio’s overall duration in the 2 to 5-year range.

A full month of fighting between the U.S. and Iran: central banks sell $81.5 billion in U.S. Treasuries

According to foreign media, after more than a month of fighting in the Gulf, energy prices and the cost of living have been pushed higher. As inflation worries intensify, traders earlier even priced in a 50% chance of a rate hike by the Fed in October. This contributed to a sharp selloff across global bond markets, heavily hurting U.S. Treasuries. The yield on the U.S. 2-year Treasury, which is more sensitive to interest rates, jumped to 4%. The yield on the UK’s 10-year Treasury surged even further to 5%, with London’s borrowing costs hitting the highest level since the 2008 financial crisis.

The U.S. Dollar Index rose to 100.61 yesterday, reaching an eight-month high. It coincided with U.S. 10-year yields falling below 4.4%, and 30-year yields slipping below the 4.9% threshold; the 2-year yield once fell to around 3.8%. After that, Fed Chair Powell delivered a calming message, indicating that there is no intention to raise rates for now, and the bond market stabilized and stopped the slide. Also, since the outbreak of the Iran-Iraq war, central banks around the world have sold $8.15 billion worth of U.S. Treasuries.

OCBC Overseas Chinese Bank’s Wang Hao-ting says a wave of Treasury sales; Malaysian bonds rise against the trend

OCBC’s Hong Kong economist Wang Hao-ting said the bank maintains its forecast of one Fed rate cut, expecting the federal funds target range to end the year at 3.25 to 3.5%. Oil prices are pushing up expectations for imported inflation. Investors have re-priced central bank policy, leading to selloffs in bond markets across many Asian countries. Worth paying attention to is that during the recent selloff wave, Malaysia’s government bonds (MGS) performed better than U.S. Treasuries (USTs) as well as other countries’ government bonds across Asia. The bank forecasts the yield on Malaysia’s 10-year government bonds at 3.45% by year-end. Meanwhile, its forecast for the U.S. 10-year Treasury yield is 4.1% by year-end, and for the 2-year Treasury yield is 3.6%.

JPMorgan + PIMCO both urge buying bonds to lock in high yields

A Wall Street bond trader believes that the financial markets have underestimated that the U.S.-Iran war could lead to risks of a sharp slowdown in the U.S. economy, which has already been weak, including the risk of the economy slowing abruptly. Fund managers including Pacific Investment Management Company (PIMCO) and JPMorgan expect the bond market to rebound, resulting in yields falling back. Current yields are generally already at attractive levels.

Goldman Sachs said that the probability of a U.S. recession over the next 12 months has risen to about 30%, and Pimco also believes the probability is more than one-third. Once markets recognize that economic growth is being negatively affected, it will lead to Treasury yields moving lower.

Long-term bond investors’ concerns about inflation have prompted them to sell bonds aggressively, which in turn creates an opportunity to enter the market now and lock in high yields.

Standard Chartered Wealth Solutions’ chief investment office released its global market outlook for the second quarter. It said that the Middle East conflict remains full of uncertainty. The base case (70% probability) expects that international oil prices will be tested for another high in the coming weeks before topping out, and the impact on inflation may be temporary. The economy is expected to maintain a soft landing and will be supported by Fed rate cuts in the second half. However, if oil prices stay high for months (30% probability), or if inflation is seriously affected and constrains the Fed’s room to cut rates, it could create a chain reaction affecting both stocks and bonds. If U.S. 10-year yields rise above 4.25%, investors should lock in yields. In addition, as credit spreads on corporate bonds increase, it calls for an overweight allocation to high-yield bonds in developed markets.

33 new bond funds emerge during the rate-cut period

As an additional note, as the market expects the U.S. to gradually ease rates and the industry’s bond fund launches cool off, only one bond fund was approved by the SFC in February. But over the past six months, 33 related products have still been launched:

#Only 1 new bond fund approved in February this year:

• Anquan Investment Fund’s Hu’An Global Financial Bonds Fund

#3 new “bond funds” cleared in January 3:

• Nomura Funds’ Ireland–Global High Yield Bonds Fund

• 广发 Short-Term Investment-Grade Bonds Fund

• Aberdeen Asset Management–Global Enhanced Income Bonds Fund

#4 new “bond funds” cleared in December last year:

• Value Partners Global Short-Duration Investment-Grade Bonds

• Cathay Capital-Young? Global Selected Bonds

• Harbour Bond Yield Fund

• Harbour High Yield Bonds

#5 new “bond funds” approved in November last year:

• Schroders Investment-Grade Global Income Bonds Fund

• BNP Paribas Euro High Yield Short-Duration Bonds

• BNP Paribas Euro Short-Duration Corporate Bonds Momentum

• China Merchants International Global Investment-Grade Selected Bonds

• HSBC Global Fund lCAV–Income Advantage Bonds, aiming to provide a fixed monthly distribution of 8%. HSBC （00005） It was launched in mid-December last year, but was halted in less than half a month for this retail fund involving private placement credit

#5 “bond funds” approved in October last year:

• CICC Selected Investment-Grade Bonds Fund

• Harbour Quantitative High Yield Bonds Fund

• CDB? — CITIC? (Leong?) Ultra-Short-Duration Global Investment-Grade Bonds Fund

• Ping An? International Multi-Strategy Bonds

• Invesco Euro Short-Term Bonds

#14 “bond funds” approved in September last year:

• Muzinich Asia Opportunities Bond Fund

• Muzinich Emerging Markets Short Bonds

• Muzinich Enhanced Yield Short Bonds

• Muzinich Global Investment-Grade Bonds

• Muzinich Global Short-Term Investment-Grade Bonds

• Muzinich Global Flexible Bonds

• Muzinich Short-Term High Yield Bonds

• Amundi series—Global Bond Income Fund

• Amundi U.S. Dollar Bond Income Fund

• New York Mellon U.S. Treasury Fund

• UBS Global High Yield Bonds Fund

• China Merchants Yonglong Investment-Grade Bonds

• Jianyin International Global Investment-Grade Short-Term Bonds

• Huaxia Selected Offshore RMB Income Bonds

#Approved “bond funds” in August last year:

• Aberdeen Bonds—Global Short-Term Corporate Bonds Fund

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