Executive summary
- Rising bond yields are a result of geopolitical, macro, and technical factors.
- Elevated inflation concerns now are due to supply-driven energy shock, rather than demand-pull factors.
- Long-term inflationary expectations are expected to recede. The risk of a sustained 2022-style stagflation regime appears low.
- Higher yields may create bouts of volatility but also provides more attractive entry points for income-minded investors.
- Investors may wish to stay selective, adopting a valuation aware approach on duration and credit, while remaining focused on portfolio resilience and diversification.
- Rising bond yields reflect a re-pricing of macro risks rather than a broad-based deterioration of fixed income fundamentals.
Why are bond yields rising?
The recent rise in global bond yields reflects a combination of geopolitical, macro, and technical factors rather than a single dominant driver. In our view, the move higher in yields has been driven by three broad forces: (1) a renewed inflation risk premium linked to higher energy prices, (2) fiscal and supply fears across major developed markets, and (3) continued resilience in economic activity that has delayed the market’s expected path of monetary easing.
(1) First, geopolitical developments have contributed to a higher inflation premium. The disruption around the Strait of Hormuz has kept oil prices elevated and raised the risk that inflation proves stickier than previously expected. In that environment, markets have reassessed the likelihood and timing of rate cuts, particularly in the US.
(2) Second, the rise in yields has not been confined to the US. Long-end yields in Japan and the UK have also moved higher amid fears around fiscal expansion, rising bond supply and domestic political uncertainty. That matters because developed market bond yields increasingly move in sympathy when investors are required to absorb higher sovereign issuance across multiple jurisdictions at the same time.
(3) Third, the macro backdrop has remained firmer than many had expected. Economic data, particularly in the US, has so far not shown the degree of weakness that would force an immediate policy pivot. As a result, the bond market has pushed back against earlier expectations of Fed easing and repriced for a more extended period of “high for longer” interest rate environment.
That said, we do not view the current episode as a replay of 2022. The starting point today is materially different. The key driver of stagflation in 2022 was excessive money growth, alongside excessive demand driven by the hangover of massive stimulus during COVID. In contrast, policy rates are already much higher today, longer-term inflation expectations have been more anchored, and the present oil shock is more supply-driven rather than demand-driven. While the near-term inflation impulse is a genuine risk, the probability of a sustained 2022-style stagflation regime appears lower in our base case.
What to do when bond yields rise?
A rise in yields is typically associated with mark-to-market weakness in existing bond holdings, but that is only part of the picture. For medium- to long-term investors, higher yields also improve the forward return profile of fixed income by raising re-investment rates and increasing the compensation available for taking duration risk.
In our view, the appropriate response is not to treat higher yields purely as a negative, but to assess whether the adjustment is creating more attractive entry points. Current yield levels offer meaningfully better carry than in the low-rate period, and that improves the role that fixed income can play in portfolios – both as an income-generating allocation, and as a potential source of diversification if growth slows more meaningfully later.
At the same time, selectivity remains important. The near-term path for yields may still be volatile, particularly if inflation fears remain dominant in the short run. However, the same tightening in financial conditions that pushes yields higher can eventually begin to weigh on demand and growth, which in turn can reopen the case for duration. In other words, we think investors should be careful not to extrapolate the current sell-off linearly. The balance between inflation persistence and growth slowdown can shift quickly.
This argues for a disciplined and valuation-aware approach rather than a binary one. The question is less whether yields rise or fall in the very near term, and more whether portfolios are being adequately compensated for the interest rate and credit risk they are assuming. In the current environment, that argues for maintaining flexibility on duration, preserving liquidity where appropriate, and continuing to focus on segments of credit where all-in yields remain attractive relative to underlying fundamentals.
How are our flagship fixed income funds positioned?
Across our flagship fixed income strategies, our positioning remains selective and measured. Broadly, we are balancing near-term rate volatility against the view that higher yields are gradually improving medium-term return potential.
In our benchmark-relative USD credit strategies, duration is generally neutral to modestly underweight. This reflects the fact that the market narrative can still move quickly between inflation fears and growth concerns, and we do not see a sufficiently asymmetric case to take a more aggressive duration stance at this stage.
In our absolute return credit strategies, duration is close to neutral, or somewhat below historical neutral levels. This preserves flexibility while allowing us to add duration more meaningfully should the macro balance shift more clearly toward growth fears and policy support.
On credit, we continue to see merit in maintaining an overweight to credit beta. More broadly, we remain constructive on credit, with the resilience in credit spreads, many of which have retraced to pre-war tights, reflecting the strength of underlying corporate fundamentals.
Within that, we remain constructive on Asian investment grade credit. Although Asian USD investment grade spreads are tight in absolute terms, they continue to be supported by relatively low net supply, solid issuer fundamentals and a shorter duration profile than US investment grade credit. That combination still offers a reasonably attractive spread-per-unit-of-duration-risk trade-off in our view. Likewise, we also continue to see merit in selective exposure to Asian high yield, where spread carry can help cushion rate volatility.
Within SGD bond strategies, we continue to favour SGD credit. Our preference is supported by resilient credit fundamentals, softer supply technicals and continued investor demand. In addition, SGS duration has held up relatively better than US Treasuries in the recent environment, supported by haven demand and a more limited supply backdrop.
Within our broader fixed income framework, the emphasis remains on thoughtful risk calibration rather than aggressive directional positioning. We continue to evaluate opportunities through a combination of top-down macro assessment and bottom-up issuer research, with position sizing driven by valuation, downside resilience and portfolio role.
Conclusion
The recent rise in bond yields should be understood as a repricing of macro risk rather than as evidence of broad-based deterioration in fixed income fundamentals. Markets are contending with a more complicated mix of inflation risk, fiscal supply pressure and still-resilient growth, and that is keeping term premia elevated.
From an investment perspective, higher yields create near-term volatility but also improve the starting point for future returns. Our current approach is therefore to remain selective on duration, constructive on areas of credit where fundamentals remain sound, and prepared to add risk opportunistically where valuation becomes more compelling.
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