12 March 2026
SUMMARY
➤ The US–Iran conflict has introduced a significant supply-side shock to energy markets, exacerbating global inflationary concerns. This volatility is layering onto pre-existing structural risks, including protectionist trade shifts and fiscal sustainability fears, effectively narrowing the “soft landing” window for major economies.
➤ The initial “risk-off” impulse triggered a sell-off in risk assets and treasuries, while the US Dollar (USD) asserted its role as the primary defensive anchor. The typical “safe-haven” Treasuries have been tempered by inflation expectations, leading to a significant upward shift in benchmark yield curve as investors demand a higher term premium.
➤ While we expect up to 50 bps cut of Fed easing through 2026 to cushion growth, sustained energy price pressure may delay rate cut to anchor inflation expectations. We expect the long-end of the US Treasury curve to remain elevated, driven by the dual-headwinds of sticky inflation and heavy Treasury issuance.
➤ We project the OPR to remain at 2.75% throughout 2026. We expect inflationary pressures to arise from higher energy prices to be offset by the government’s subsidy, keeping inflation within the target range.
➤ We maintain our duration range to 4.0 – 5.5 years with an overweight position in high-grade corporate bond, trading at a reasonable yield to balance risks and returns. Focus remains on the accrual of high-quality coupons to generate consistent income stream and offset short-term price fluctuations over time.
- Middle east tensions are intensifying as US and Israel jointly launched military strikes against Iran’s leadership with the war heading to its third week. Crude oil prices skyrocketed as Brent and West Texas Intermediate (WTI) briefly touched US$ 111 (prior: US$ 71) and US$ 95 (prior: US$ 67) per barrel respectively on intraday trading.
- The effective paralysis of the Strait of Hormuz has disrupted nearly 20 mil b/d of global flows. With Gulf production curtailed by at least 10 mil b/d, the market has transitioned into a severe structural deficit, as curbed global supply (now estimated 98.9 mil b/d in March) fails to reach expected demand of 104.7 mil b/d.
- To counteract the shock, the IEA authorized a historic release of 400 mil barrels (approx. 13.3 mil b/d). This coordinated intervention saw a cooled response in Brent crude to US$ 91/bbl (as of 11 March). The structural deficit remains unaddressed due to inefficient refining infrastructure and the prohibitive cost of rerouting global energy flows. The eventual exhaustion of strategic stockpiles could still hint a secondary price spike.
POLICY TRILEMA: INTEREST RATES, INFLATION EXPECTATIONS AND FISCAL POLICIES.
- Surging oil prices have pivot inflation expectations upward, creating a challenging “stagflationary” backdrop for major central banks. According to IMF, a sustained 10% increase in crude oil price for the year is projected to raise global headline inflation by 0.4% and reduce economic growth by 0.1-0.2%.
- The recent US Congressional Budget Office (CBO) estimated that Trump’s One Big Beautiful Bill Act (OBBBA) could add $4.7 trillion to the national debt over the next decade. The office warned that the fiscal effect of higher federal debt service and interest expense is outweighing economic growth.
- In a departure from historical “flight-to-safety” typical of wartime periods, the US Treasury market has experienced a broad sell-off. Investors are increasingly penalizing the long-end of the curve, driven by the potential heavier Treasury issuance driven by the dual burden of funding both OBBBA and the US–Iran conflict.
- Against this backdrop, monetary policy decisions have become more challenging as central banks grapple with the trade‑off between supporting economic growth and keeping inflation aligned with their targets. Expectations for US rate cuts have been pushed further from June to September on potential inflation persistency, prompting the Fed to adopt a “wait‑and‑see” approach amid early signs of labor market stabilization.
GLOBAL SOVEREIGN YIELD SURGE: A SIGNAL OF FISCAL AND INFLATIONARY STRESS
Schedule 1: Yield Changes for Selected Major DM & EM Treasury Sovereigns
| GLOBAL 10-YRS TREASURIES | YIELDS BEGINNING OF THE YEAR | PRE-WAR YIELDS (27 FEB 2026) | Δ YIELDS (bps) | CURRENT YIELDS AS OF 12 MARCH 2026 | Δ YIELDS (bps) CURRENT VS PRE-WAR (27 Feb 2026) |
|---|---|---|---|---|---|
| US Treasury | 4.167% | 3.938% | – 22.9 | 4.261% | +32.3 |
| UK Gilts | 4.479% | 4.233% | – 4.6 | 4.773% | +54.0 |
| Japanese Government Bonds | 2.059% | 2.111% | + 5.2 | 2.178% | +6.7 |
| German Bunds | 2.854% | 2.643% | – 21.1 | 2.955% | +31.2 |
| Korea Treasury Bond | 3.385% | 3.450% | + 6.5 | 3.609% | +15.9 |
| Indonesia Government Bond | 6.031% | 6.413% | +38.2 | 6.687% | +27.4 |
| Malaysia Government Securities | 3.492% | 3.483% | -0.9 | 3.551% | +6.8 |
| Thailand Government Bond | 1.638% | 1.712% | +7.4 | 1.916% | +20.4 |
Source: Bloomberg, OpusAM
- Globally, the bond market came under pressure, driven by concerns over rising inflation risks and expanding fiscal deficits, prompting investors to demand higher compensation for holding longer‑dated debt. The benchmark US Treasury yields have shifted upward by 27-31 basis points (bps) across the curve in response to these risks, with the US Treasury (UST) 10-year and 30-year yield climbing to 4.26% and 4.88% respectively as of 12 March 2026. Similarly, UK Gilts, Japanese Government Bonds and German Bunds rose 30-54 bps as of 12 March 2026.
Source: Bloomberg, OpusAM
- As a result, global investment grade (‘IG’) space is being more impacted by the upward shift in government bond yields rather than from credit defaults. The Bloomberg US Aggregate Corporate average option-adjusted spread (‘OAS’) had retraced to 90 bps as investors are treating ‘High-Quality’ debt as perceived safe haven thereby keeping spread over benchmark sovereign tight even as all-in yields climbed higher.
- Emerging market, which mainly comprises of net energy importers including China, India, South Korea, Philippines and Thailand, saw credit spread widening quicker than the US given EM sovereign has less fiscal space to absorb the shock from higher energy prices. This is reflected in the Bloomberg EM Average OAS which peaked at nearly 100 bps before both IEA and G7 announced their consideration for oil stock release.
- Furthermore, EMs must compete for a shrinking pool of global liquidity as US Treasury yields soared given the hurdle rate for holding Thai or Korean debt has risen exponentially. When US 10 years benchmark yield exceeds 4%, the opportunity cost for holding EM debt becomes prohibitive resulting in capital being reallocated away from EM energy importers and back into US Dollars, a trend exacerbated by the US’s status as a net energy exporter.
MALAYSIA “TIGHT BUT ANCHORED” CREDIT ENVIRONMENT
- Despite global swings, Malaysia’s IG credit remained anchored, supported by deep domestic liquidity from institutional investors and long-liability players (pension funds, unit trusts and insurance companies) who have been active “dip buyers,” absorbing the supply and keeping spreads from widening aggressively.
- Domestically, the Malaysia Government Securities (MGS) benchmark yield curve had marginally shifted up by 2-8 bps, with MGS 10-year yield closed at 3.56% as of 12 March 2026. The AAA-rated corporate spreads remained remarkably anchored, widening by only 2–4 bps relative to the MGS benchmark.
- We have also observed upward yield drift between the MGS benchmark yield which has risen ~11 bps this week due to US Treasury yield movements despite IG corporate spreads have marginally widened by an average of 2–3 bps. This indicates that the corporate bond prices are falling almost exactly in line with government bonds, showing no signs of credit-specific panic.
- Since beginning of March, the 7-years single-A rated spreads have expanded by 2 – 5 bps to 115 bps with potential for further spread widening given this rating segment is experiencing “price discovery” issue. Based on recent BPAM’s market implied ratings – credit ratings (BIR-CR) divergence report, approximately 37% of A-rated bonds show a market implied rating that is lower than their official credit rating.
Source: Bloomberg, BPAM, OpusAM
DOLLAR’S FLIGHT TO LIQUIDITY
- After a strong rally in 2025, the gold saw limited safe‑haven buying after the attacks, declining nearly 2% before the attacks and hovering around USD 5,100–5,200 per ounce, well below last year’s record highs. Expectations of prolonged elevated interest rates and higher real yields limit gold’s upside potential. In contrast, the US dollar strengthened, with the DXY Index up 1.70%, as tighter financial conditions and inflation concerns pushed investors toward cash and liquidity.
BOND MARKET OUTLOOK AND OPUS VIEW
- Market volatility is expected to persist given escalating geopolitical risks compounded by uneven economic growth, trade regime shifts and weakening fiscal sustainability.
- While we maintain a baseline expectation for 50 bps of Fed easing through 2026 to cushion growth, the trajectory is clouded by uncertainty. Sustained energy price pressure may delay rate cut to anchor inflation expectations.
- US Treasury yield curve is expected to stay elevated at the long end, driven by concerns over persistent price pressures and increased Treasury issuance, while the short end may remain volatile in response to short-term economic releases and Trump policy signals.
- We maintain our projection that the Overnight Policy Rate (OPR) to remain at 2.75% through 2026 and potential further easing should our economic growth fall below official forecast. Despite higher energy prices that could potentially generate second-round inflationary effect, these pressures are expected to be offset by government subsidy framework. As such, we project inflation to be within the government’s projected range of 1.3% to 2.0% despite potential surge in short-term inflationary pressures from higher energy prices.
- The domestic bond market is expected to remain resilient, supported by narrowing interest differentials, continued institutional demand and the Federal Government’s commitment in fiscal consolidation path.
- We are proactive in managing our portfolio’s duration to be within our in-house duration strategy of 4.0 – 5.5 years with an overweight position in high-grade corporate sukuk. In a relatively flat yield curve environment, we prioritize high‑quality “carry” that generates stable and regular income to cushion short‑term market volatility.
Disclaimer
The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Individual investors should contact their own licensed financial professional advisor to determine the most appropriate investment options. This material contains the opinions of the manager, based on assumptions or market conditions and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information provided herein may include data or opinion that has been obtained from, or is based on, sources believed to be reliable, but is not guaranteed as to the accuracy or completeness of the information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Opus Asset Management Sdn Bhd and its employees accept no liability whatsoever with respect to the use of this material or its contents.
