Investors buy the dip in bonds as the sovereign-corporate divide widens: Aberdeen executive

[SINGAPORE] Fixed income markets have held up better than expected through a year of geopolitical shocks and volatility – a trend that came as a surprise to Jonathan Mondillo, global head of fixed income at Aberdeen.

While bond markets were rattled, investors seemed to take the sell-off as an opportunity to buy in, said Mondillo.

“Even to this day, when I look at markets as it relates to what is going on in the Middle East, markets seem to be able to look through the risks and are generally quite sanguine about things,” he told The Business Times.

This resilience was not the only surprise, particularly following the “Liberation Day” tariffs announcement in April 2025, which were expected to trigger deeper dislocations. Instead, frontier markets became one of the top-performing segments in fixed income, an outcome Mondillo did not expect.

To him, this trend underscores both the strength of issuer fundamentals in both emerging and developed markets, as well as continued investor demand for yield in bond markets.

While fixed income is typically seen as a lower-volatility asset class compared with equities, swings in US Federal Reserve rate expectations have driven bouts of volatility. Still, Mondillo said that bonds still offer relatively more safety given their senior position in the capital structure.

“While volatility may persist, fundamentals broadly within credit remain quite positive,” he noted.

A key dynamic shaping the fixed income markets is the divergence between government and investment-grade corporate bonds.

US Treasury bonds have experienced rates moving up on fiscal deficits and increased spending, while the corporate bond market remained historically tight in terms of credit spreads, Mondillo said.

This is due to a couple of factors, including increased concerns over the US’ fiscal position, alongside improving corporate balance sheets, he pointed out.

However, this changes when looking at fixed income in emerging markets, where both sovereigns and corporates have tightened their spending.

“We actually think that the fundamentals, both at the sovereign level, as well as at the corporate level, are in a pretty good place in terms of balance sheet and profitability,” said Mondillo.

This also extends to the bonds financing the artificial intelligence boom, as he noted that most of the tech issuers are still “high quality”. These are companies that have a good cash flow and cash generation and are established in this sector.

“With the exception of a handful that are of lower investment grade, you are still looking at high-quality issuers that are coming to the market with cash on the balance sheet still.”

Strong demand continues to underpin issuance – while 2025 was a record year for corporate bond issuance, 2026 was on track to beat it before the conflict in the Middle East raised volatility, explained Mondillo. Issuers want certainty, from the funding levels which they can tap to credit spreads that will be part of any bond issuance.

But demand for investment-grade bonds still outstrips supply, with deals being regularly oversubscribed, he added. “When you look over the last 20 years, all-in yields for both investment-grade and high-yield bonds are at pretty attractive levels, both within developed markets, as well as emerging markets.”

Geopolitical risks, however, remain a major concern for Mondillo, with the world currently grappling with elevated risks from the conflict in the Middle East.

While recent episodes have shown markets’ ability to absorb shocks, he cautioned that investors need to be disciplined and avoid taking on excessive risk.

“Ensure that you are focused more so on bottom-up fundamentals, corporate profitability, fiscal balance relative to imbalance at the sovereign level as opposed to broader macroeconomic top-down themes,” he added.