HSBC keeps bonds as a core holding and focuses on steady income. It says inflation is largely contained across most developed markets and expects the effect of the oil price spike to be short-lived. The bank says central banks are almost finished with rate-cut cycles. It favours medium-to-long duration in euro and sterling bonds, while keeping medium duration in US dollar bonds.

Developed Market Bond Preferences

Among developed market government bonds, it prefers UK gilts and Australian government bonds. It also considers emerging market local currency sovereign bonds, citing lower correlation to risk assets. In credit, it prefers investment grade and emerging market bonds over high yield. It notes that high yield credit spreads remain tight and looks for value in emerging markets with solid fundamentals and yields from higher-quality issuers. It says a recent US Supreme Court ruling on US trade tariffs should have little effect on bond yields. It adds that the high US fiscal deficit may limit how far yields can fall, and it sees better prospects in the UK and some emerging markets. We believe that stable income is now the primary goal, as the major central bank rate-cutting cycles that dominated 2025 are largely complete. With inflation mostly under control, the focus shifts to finding the best relative value across different government bond markets. This environment suggests positioning for specific interest rate moves rather than broad market shifts.

Strategy Implications For Duration

Given this outlook, we see better prospects in UK gilts compared to US Treasuries. The latest UK inflation data for February 2026 came in at 2.1%, while Q4 2025 GDP growth was a sluggish 0.1%, giving the Bank of England reason to remain accommodative. This supports taking on long-duration positions in the UK, likely through buying Long Gilt futures. In the United States, the potential for yields to fall is limited by the high fiscal deficit, which the Congressional Budget Office recently projected to remain above 5.5% of GDP. Therefore, our strategy involves maintaining a more cautious medium duration in US Treasuries. This might involve using 10-year Treasury note futures to capture modest price movements without over-exposing to longer-term interest rate risk. On the credit side, we prefer the safety of investment-grade bonds over high-yield debt. The spread on the US Corporate High Yield Index tightened to just 310 basis points last month, a level not seen since mid-2025, offering poor compensation for default risk. A strategic response could involve buying credit default swap (CDS) protection on high-yield indices. We also find value in Australian government bonds and select emerging markets offering solid fundamentals. For instance, with inflation in Mexico now trending down towards 4%, its high policy rate offers attractive real yields and a diversification benefit. These positions can be expressed through bond futures or currency derivatives that benefit from stable or appreciating local currencies. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account