2025 Q2 Market Outlook: Finding Bond Investment Opportunities in Uncertainty

Tariff may slow the US economy, causing fluctuations in US Treasuries
Resilient Asian credit fundamentals help hedge against market volatility
Asian investment-grade dollar bonds are of superior quality; relatively insulated from tariff impacts
Turning more positive on Chinese property bonds, Chinese industrial also favoured; took profits on Indian bonds

The unpredictable tariff policies of US President Donald Trump have led to significant global market volatility, compounded by the US stance on the Russia-Ukraine conflict, increasing market uncertainty. Investor concerns that tariffs could push the US economy into recession and weaken future confidence have triggered sell-offs in 10-year US Treasuries. Despite these challenges, BEA Union Investment believes that Asian USD bond credit fundamentals remain solid. Few bond issuers rely heavily on exports to the US, which positions Asian companies relatively well to weather external pressures. Asian high-yield USD bonds have generally declined in price; amid ongoing uncertainty, we recommend reducing exposure to some high-yield bonds while increasing cash position. Non-China markets could experience consolidation, and we recommend taking profits in regions such as India. China's property sector is seeing positive credit developments, and we favour China's industrial bonds and a neutral stance on certain Mongolian bonds.

Source: Investing.com, data from November 1, 2024 to April 8, 2025

US Treasury and Interest Rate Outlook

Recent volatility in the US Treasury market has intensified, with a notably steepening yield curve. Weak demand for newly issued 3-year Treasuries raised concerns about foreign investor appetite. However, successful auctions of 10- and 30-year Treasuries, along with a 90-day tariff suspension, have helped stabilize market sentiment.

With escalating global trade tensions and rising economic risks, the market anticipates the Federal Reserve may cut rates three times this year. Although March CPI data was weaker than expected, it is viewed as a pre-tariff price adjustment phase. US Treasury yields may steepen further due to expectations of widening fiscal deficits. Market volatility is expected to remain elevated, and we maintain a neutral stance on US Treasuries.

Asian investment-grade dollar bonds

Asian investment-grade USD bonds exhibit strong credit quality. Despite increased global rate volatility, their lower leverage and higher credit ratings relative to US and European peers offer superior risk-adjusted returns. Our team continues to seek opportunities in relatively undervalued segments for diversified investment.

AI development buoys Chinese TMT bonds; took profits on SOE bonds with lofty valuations

Following a series of stimulus measures implemented by the Chinese government last year, China's economy and property sector are exhibiting signs of stabilisation . In addition, the launch of DeepSeek has buoyed market optimism surrounding AI development, leading to a persistent narrowing of credit spreads in technology, media and telecommunications (TMT) bonds. Credits issued by other state-owned enterprises (SOE) also demonstrated solid performance. While China's investment-grade bond market remains underpinned by robust fundamentals, we have taken profits on select credits due to relatively hefty valuations. In Hong Kong, a previously distressed real estate developer reportedly completed refinancing successfully, though risks remain, and potential renewed issues could have knock-on effects on the banking sector.

Asian high-yield bonds

China's property crisis had previously crippled sentiment for Asia's high-yield dollar bond market. However, with the real estate market stabilising and the improving fundamentals of certain property bonds, the sector is starting to regain its momentum. The credit quality of Asian issuers remains sound, with relatively low default risks. Given that some emerging-market sovereign bonds and non-China corporate debts have already seen substantial gains, we have taken profits on certain bonds.

Chinese firms return to dollar debt market; turning more positive on Chinese property bonds

A major real estate developer's early bond redemption has supported the long-dormant Chinese USD bond market. Bond issuances have followed, coming in quick succession from companies such as commodities producers, conglomerates and developers. Among them, bonds issued by a large-scale aluminum smelter were oversubscribed. In addition, a state-owned developer issued an additional US$150 million in dollar bonds for refinancing, just one week after its successful US$350 million issuance in February. These new issuances are on the radar of BEA Union Investment. As China's housing sector starts to recover, we are becoming relatively positive about that space. Furthermore, Chinese industrial bonds are also in focus due to their limited supply. For frontier markets, BEA Union Investment upholds a neutral stance on Mongolia's macroeconomic outlook, with a particular focus on corporate bonds.

Conclusion

Given frequent tariff and geopolitical developments causing market fluctuations, we recommend investors to adopt a selective allocation strategy. Focus on issuers with solid fundamentals and reasonable valuations, while moderately reducing exposure to high-risk and trade-sensitive sectors.