With global interest rates holding at elevated levels, the bond market continues to face volatility, yet inflationary pressures have subsided from their 2022 peaks, while policy rates and bond coupons remain relatively high. Fidelity International portfolio manager James Durance expresses a preference for short-duration bonds, noting that their yields are comparatively more attractive than longer-dated equivalents, although he acknowledges that short-duration instruments also carry higher volatility. He points out that investors willing to embrace the volatility risks associated with potential U.S. rate hikes exceeding three moves could still capture an additional 100 basis points in yield returns.

Durance favors emerging market debt, citing its ability to deliver higher coupon payments relative to developed market bonds, alongside a notable trend of credit rating upgrades for many emerging market corporate issuers in recent years. The portfolios he manages hold positions including bonds issued by Macau casino operators, as well as select Chinese investment-grade debt. From a sector perspective, he is particularly constructive on financial institution issuance, encompassing bank and insurance company bonds across Asia and Europe, arguing that the higher-rate environment bolsters banks' net interest income.

Conversely, given concerns over trade tensions and supply chain disruptions, Durance adopts a more cautious outlook on industrial companies and firms tied to multinational transportation. In the technology sector, Durance highlights that primarily U.S.-based tech giants are dominating corporate bond issuance, with tech-related debt supply growing at an unprecedented pace, yet the performance of these issues is likely to be constrained by oversupply. Taking U.S. hyperscalers as an example, their outstanding debt constituted merely 2% of the overall market at the beginning of last year, is projected to expand to 6% by the end of this year, and is anticipated to increase further in the coming year.