Fidelity International: Investing in USD bonds should adopt a defensive posture, focus on financial bonds and protect bond opportunities.

Fidelity International's Director of Offshore Distribution in Hong Kong and China, Pan Anmei, said that as we enter 2025, there are signs of a slowdown in US consumer spending. The Trump administration is expected to raise import tariffs or increase inflation, posing potential risks to the US bond market. At the same time, the spread between investment-grade bonds in the US has narrowed to historically low levels, which is not sufficient to compensate for additional credit risks. Investors should adopt a defensive approach when investing in US dollar bonds this year. Consumer spending accounts for nearly 70% of the US GDP and is a main driver of economic growth. With consumers having depleted their savings accumulated during the pandemic, there are recent signs of a slowdown in US consumer spending, and credit card debt has reached new highs. The labor market, which is closely tied to economic growth momentum, is also facing pressures of rising unemployment rates in recent months. Against the backdrop of weakening consumer spending and underlying concerns in the labor market, there is uncertainty in the pace of US economic growth. If economic growth significantly slows down, it may prompt the Federal Reserve to accelerate rate cuts, but inflation may not necessarily cooperate. Despite the cooling job market, deflation in the service sector has deep roots, housing costs are slowing down, and inflation is expected to gradually decrease to 2%. On the other hand, the US may raise import tariffs, which could push inflation up and influence the Federal Reserve's rate-cutting decisions. It is worth noting that consumers currently seem less sensitive to interest rate changes, and the market is beginning to question the effectiveness of rate cuts. Furthermore, the US investment-grade bond market is currently almost fully valued, with spreads at their narrowest since 1998, insufficient to compensate for additional risks, especially in the event of economic growth or slowdown. Although the overall yield of investment-grade bonds is still relatively attractive, the narrow spreads are mainly driven by continued buying demand, leading to a disconnect between valuation and fundamental factors to some extent. This means that if buying demand weakens, it could become a potential risk. If bond supply increases through corporate refinancing or merger activities this year, it could also disrupt the demand-driven balance that has been in place. In conclusion, given high valuations and potential risks, this year's strategy for investing in US dollar bonds should lean towards a defensive approach to mitigate the impact of market volatility. Investors should carefully consider the high valuations of US investment-grade bonds and the long-term trends in various industries, and pay attention to opportunities in industries that still offer investment value, such as short-term financial sector preferred bonds and defensive healthcare corporate bonds.