Taikang Asset (HK)

The global financial market is volatile, with geopolitical instability in Russia-Ukraine and the Middle East, as well as U.S. tariff negotiations, trade policy adjustments, and the reshaping of global supply chains, posing many uncertainties to the investment market. 

Looking around different markets worldwide, the economic performance in the Asian region has been robust, reflecting excellent growth potential and it is expected that its growth rate will continue to exceed the global average level. As we step into the fourth quarter of 2025, how should investors review and adjust strategies to seize growth opportunities while controlling portfolio risks in this challenging and opportunistic juncture?

Global monetary policy factors, especially in the United States, continue to be favorable for fixed income. Recent economic data shows that the U.S. economy is slowing down, but the likelihood of a recession is relatively low. Bank of America believes that the August employment report may exacerbate the Federal Reserve's concerns about labor market weakness, thus predicting two rate cuts this year, in September and December, each by 25 basis points. Given that the core Personal Consumption Expenditure (PCE) inflation rate may reach 3% and continue to rise until the end of the year, the bank believes the Fed will not cut rates in October. However, Bank of America also points out that three scenarios could lead to rate cuts beyond the aforementioned expectations. If the labor market further significantly weakens, the Fed will cut rates in September, October, and December, and may continue to cut rates next year. If inflation cools faster than expected, the Fed may cut rates by another 25 basis points in March 2026. Lastly, the new Fed Chairman might push for faster or larger rate cuts, especially when there are changes in the composition of the Federal Open Market Committee (FOMC) members. President Trump has repeatedly pressured the Fed Chairman to cut rates, anticipating that dovish forces within the FOMC will strengthen, and interest rates are likely to remain volatile.

Yields Across Various Markets (%)

With the Federal Reserve cutting interest rates, the U.S. dollar is expected to weaken further, improving financing conditions in the Asian region. Especially since the peak of the default cycle for Chinese real estate bonds has largely passed, and other investment-grade bond issuers with good fundamentals and low debt levels further demonstrate the attractiveness of Asian bonds. Therefore, when the short-term rate cut window opens in the market, U.S. dollar bonds continue to enjoy return space. Investors allocating high-quality short-term U.S. dollar bonds are an important part of diversified asset allocation, helping to balance risks and opportunities, and can build a robust investment portfolio to lock in relatively high absolute yields amid market volatility.

Investment-grade U.S. dollar bonds are crucial allocation assets

Looking ahead, although short-term interest rates benefit from the opening of the rate cut window, caution is needed regarding the market volatility that may be triggered by macroeconomic developments and the trend of de-dollarization. In the current environment, prudent investors are still suited to adopt medium to short duration strategies to navigate the uncertainties of the macro environment. Investors can carefully seek out experienced and outstanding fund managers. Through active management, these managers can pursue absolute returns and create sustainable value by selecting bonds across cycles; moreover, they have demonstrated low volatility, low drawdown, and successfully avoided bond defaults during past market downturns, achieving consecutive years of positive performance returns. It is estimated that these outstanding fund managers have a better chance of achieving target returns in the uncertain future environment.

Overall, positioning in investment-grade U.S. dollar bonds can lock in the historically high absolute yield levels, diversify portfolio risk, and in addition to coupon income, also benefit from capital gains brought by a bullish steepening of the yield curve. It is noteworthy that U.S. Treasury prices experienced significant volatility in Q4 2024 and April this year, prompting investors to seek other bond investments with strong fundamentals, low volatility, and attractive coupons. Among these, defensive bonds from politically stable Asian countries, predominantly issued by domestic demand enterprises, have become more popular. Given the current macroeconomic and tariff policy uncertainties and potential interest rate volatility, short-duration investment-grade U.S. dollar credit bonds are an optimal allocation that balances yield and risk. With credit spreads narrowing and a healthy supply-demand relationship, the absolute yields of short-term investment-grade bonds, especially in Asia, remain attractive, with lower default risks, providing highly attractive and low-volatility bond investment options for investors looking beyond U.S. Treasuries.

Performance of Various Bond Indices