Shorter-duration bonds shine in Asia as Trump's tariffs roil markets

Business Times

02-05-2025

[SINGAPORE] US President Donald Trump's tariffs shook markets across asset classes, sending investors searching for shelter. Some landed on cash, some on gold, but some money managers are finding comfort in fixed income.
'In these periods of volatility, people should look to credit and fixed income, because the income on offer is as high as it's been since the start of my career in 2010 post-financial crisis,' said Stephen Gough, Singapore-based managing director and head of Asia credit at BlackRock, the world's largest asset manager with US$11.58 trillion in assets under management.
'The yields on offer more than compensate you for the volatility and credit and if you are a little worried about equities, credit is a good place to get 6 to 9 per cent depending on whether you want to be at investment grade or higher,' he said. 'And we like Asia because of the shorter duration, so it's very hard to have a negative absolute return with the carry where it is.'
Stephen Gough, managing director and head of Asia credit at BlackRock, says: 'We like Asia because of the shorter duration, so it's very hard to have a negative absolute return with the carry where it is.' PHOTO: BLACKROCK
The S&P 500 index fell 12.1 per cent between Apr 2 and 8, after the tariffs were announced; it then jumped 9.5 per cent on Apr 9, when Trump announced a 90-day reprieve. As at Apr 28, the S&P 500 index had fallen 5.9 per cent in the year to date.
The tariffs also roiled bond markets across the risk spectrum, as high-yield bonds globally experienced the biggest slump since 2020, bringing yield premiums up 53 basis points, and investors started selling off long-dated US treasuries.
However, while sentiment on the equity market remains depressed, the recent repricing of fixed-income markets has made global bond yields look more attractive than a month ago, said Chris Wong, Singapore-based investment director of fixed income at Schroders, which manages £778.7 billion (S$1.36 trillion).
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'Risk assets such as equities will remain under pressure due to weak sentiment and negative chain effects from Trump's policies, which will very likely lead to slower economic growth,' he said. 'In this scenario, fixed income would be a great defensive play that generates income and potentially offsets equity risks over the longer term.'
'The protection offered by a rotation into bonds during a downturn in the equity market is nothing new,' said Timothy Tan and Jason Lee, Asia ex-Japan credit strategists for Bloomberg Intelligence.
However, the unwelcome correlation of US bonds, equity and the US dollar left struggling since Trump announced the tariffs is unprecedented, they said, adding that investors will also keep an eye on whether the Federal Reserve is able to bring inflation back to its 3 per cent target, which affects the real yield for US dollar asset investors.
Within Asia credit, BlackRock identifies India as a country with potential because the growth story still looks strong, and it seems to be 'on the right side of the tariffs', said Gough. India was hit with 26 per cent tariffs, far above the minimum 10 per cent tariff slapped on countries such as Singapore, but lower than the 34 per cent on China and 49 per cent on Cambodia.
'We see the Reserve Bank of India as being one of the more responsive and are definitely forecasting for rates to be cut there as well... A lot of the companies that make up our universe are somewhere between banks that still have fairly good growth and renewable companies, which are essentially immune from tariffs,' he said.
Renewable companies in India are well-protected because most of their business is driven by local demand with long-term contracts. They are also well-supported by the government, he added.
Aside from India, Gough noted that gaming companies in Macau have had strong revenue growth and that the financials sector in the Asia-Pacific has generally been strong.
Still, the asset manager has moved up the risk curve 'in terms of going from potentially sitting in the more subordinate parts of the capital to the more senior parts of the capital', he said.
'So we sort of de-risked our financials, but with the spread widening, we think that's quite interesting. We actually quite like Australian financials... Australian banks are very, very well-capitalised, fairly immune from a lot of the tariff growth; and (the country) is a fairly insular economy,' he added.
Similarly, Wellington Management, the more than US$1 trillion private asset management firm, has been 'adding credit risk over the past few weeks and continues to favour companies with high-quality balance sheets, durable free cash flow and ample liquidity to navigate a potential demand slowdown', said Boston-based Connor Fitzgerald, fixed-income portfolio manager there.
'Our interest rate outlook remains similar to the beginning of April – we believe the US economy was already entering a slowdown before the impacts of tariffs were accounted for, and that the US economy has a greater than 50 per cent chance of a recession in the next 12 months,' he said.
Connor Fitzgerald, fixed-income portfolio manager at Wellington Management, says: 'We believe the US economy was already entering a slowdown before the impacts of tariffs were accounted for, and that the US economy has a greater than 50 per cent chance of a recession in the next 12 months.' PHOTO: WELLINGTON MANAGEMENT
'It appears that the Trump administration may be underappreciating the value of the capital account of the US, which has boosted growth in the US for the past 15 years. In addition, we believe if we do enter into a recession in the US, the revenues collected by the US government will contract and therefore the budget deficit will expand. This would be counter to the administration's goals and leads us to be wary of long-duration fixed income and Treasuries in the US,' he added.
Fixed income could be an attractive option for retail and high-net-worth investors in Asia to add to their portfolios, Fitzgerald said. 'We believe high-quality, intermediate-duration credit can offer attractive income at 5 to 5.5 per cent yields, with the prospect for additional price appreciation if there is a recession and the Federal Reserve cuts interest rates.'
High yield – if the investors have the risk appetite for it – can perform even better, but the challenge is convincing the new generation of retail investors, said BlackRock's Gough.
'That's the challenge – to take the younger generation away from thinking it's either cash, crypto or equities, to thinking there is something that sits in between... If you had asked me what the S&P would have returned before all that happened at the beginning of the year, I probably would have said 10 per cent, and you could have gotten nine in high yield, right? And if I look at where our starting point is now, you probably still can get nine or 10 in high yield, but equities, I don't know,' Gough said.