Nothing that the economic picture remains clouded by disinflation, trade policy shifts and geopolitical risks, Lee says: “Monetary policy dynamics are likely to remain uneven given the irregular disinflation and tariff-induced inflation shocks.” While the US and some global economies remain resilient, downside risks persist, particularly from potential inflation spikes or sudden changes in global trade flows.
Defensive income engine
In such uncertain times, the appeal of short-duration bonds is straightforward. They reduce sensitivity to interest rate changes, generate steady income and provide optionality for reinvestment if market conditions shift. “With uncertain rate paths, short duration reduces exposure to rate volatility and offers high carry without the long duration risk,” says Lee.
This reduced duration risk is especially important today, given the lack of clarity on long-term inflation. Lee explains that key inflation metrics, such as US core personal consumption expenditure, services inflation and shelter costs, remain elevated. In particular, wage-driven inflation, exacerbated by changes in immigration and labour policies, is proving stubborn. “The stickiness in services and core inflation can drive monetary policy lags in developed economies such as the US and UK,” he says.
See also: Tariff uncertainty remains ‘biggest elephant’; ‘self-help’ measures to drive Singapore
In this context, short-duration bonds are proving effective in capturing carry without overexposing investors to interest rate fluctuations. The ability to hold high-quality bonds that mature quickly offers a blend of income and capital stability.
They also provide a structural advantage in compounding returns. “Compounding yields over time can offer significant upside in fixed income portfolios — even in low or uncertain rate environments — because of the power of reinvestment, carry accumulation and the roll-down effect on steep curves,” says Lee. He illustrates that a 5.5% yield compounded over three years produces a 17.4% total return, meaningfully higher than holding cash with zero duration.
For investors with a limited appetite for risk but seeking income, short-duration strategies are also an effective alternative to traditional safe havens. “Short-duration investment-grade or high-quality credit offer a spread over Treasuries, thereby enhancing income without excessive duration risk,” he adds.
See also: Asian bonds gain favour as real yields rise and USD weakens: Eastspring
Blending defensiveness with opportunity
One strategy that embodies this approach is Fullerton’s Short Term Interest Rate Fund (FSTIR). Launched in 2004, the $1 billion fund focuses on investment-grade, short-dated bonds across Singapore dollar (SGD) and US dollar (USD) credit markets. It aims to provide daily liquidity, income stability and risk-adjusted returns through disciplined credit selection and active management.
FSTIR accesses both SGD and USD credit markets, a key differentiator that enhances flexibility. “The SGD credit market is relatively defensive and lower beta, with credit spreads that tend to be more stable — even during periods of risk aversion,” says Lee. The stability is underpinned by a buy-and-hold institutional investor base that dampens volatility.
In contrast, the USD market is deeper and more sensitive to macro risk sentiment. During risk-on periods, the fund tilts towards USD credits to capture upside. In volatile times, it tilts towards SGD bonds, cash equivalents and government bills. “By blending exposures to both markets, FSTIR can participate in upside opportunities while maintaining a buffer during volatile periods, offering investors a balanced and differentiated credit exposure,” says Lee.
Since its inception, the fund has achieved an annualised volatility of just 1.3% as at May 31, lower than many comparable global strategies hedged to SGD. This low-risk profile makes it appealing to investors seeking steady income without high drawdown risk.
Retail access to the SGD credit market is another strength. Institutional dominance, limited issuance, and a lack of ratings coverage often restrict access to individual investors. Fullerton bridges this gap through internal credit assessment and long-standing broker relationships. “All bonds in the fund — particularly those unrated by external agencies — are subject to internal credit assessments by Fullerton’s team of sector-focused credit analysts,” he says.
The fund’s liquidity is also well structured. “The role of liquidity in portfolio construction includes capital preservation, tactical flexibility, risk management and client redemption readiness,” says Lee. The team maintains a buffer of cash-like instruments and staggers maturities to ensure it can meet redemptions and rebalance quickly if markets turn.
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This flexibility extends to tactical asset allocation. In times of stress, the portfolio shifts away from riskier, more volatile USD credits and into safer, more liquid SGD instruments. This helps preserve returns and maintain daily liquidity for investors.
Younger, digital-first investors are also being increasingly drawn to the strategy. With no lock-ups or minimum holding periods, FSTIR offers the flexibility and transparency this segment demands. “There are no restrictive terms or penalties for early withdrawal, making FSTIR suitable for investors who value flexibility in managing their cash as life circumstances evolve,” Lee points out.
Reinforcing fixed income’s core role
For years, fixed income was treated as a tactical hedge or a passive ballast in portfolios dominated by equities. That is changing. “With higher risk-free rates, yields can be a significant return driver,” says Lee. Bonds now offer not only stability but also meaningful income in a structurally more volatile world.
This is especially true for short-duration investment-grade strategies, which can deliver carry-driven returns with limited duration exposure. Lee believes fixed income is returning as a core allocation, not just as a hedge, but as an income engine and volatility buffer.
Still, he warns that many investors fall into avoidable traps. “Chasing yield blindly” without assessing credit risk, ignoring duration exposure, and treating bonds like speculative trades are all too common. He also sees many investors neglecting reinvestment, which undermines long-term returns. “Not reinvesting income leads to missed opportunities to compound returns,” he adds.
Millennials and Gen Z investors, in particular, tend to misjudge fixed income. Many believe bonds are “boring” or only suitable for older investors. Others assume bonds do not generate real returns. But with higher rates, those assumptions no longer hold. “Short-duration IG bonds now offer positive real returns after inflation,” says Lee.
He notes that bonds offer downside protection and can help cushion losses during equity drawdowns, thereby improving risk-adjusted returns. For younger investors with shorter-term goals, such as saving for a home, short-duration strategies also offer useful duration matching.
“Fixed income is not just about playing defence — it is a strategic stability plus income tool to buffer volatility, generate income, and access capital efficiently,” he says.
Looking to the second half of this year, Lee expects continued macro divergence, persistent inflation, and geopolitical noise. He recommends investors stay liquid and diversified, focusing on quality carry. A core allocation to short-to-intermediate investment grade credit should be complemented by selective emerging market debt with real yield potential and inflation-linked instruments to hedge against upside surprises.
Lee says: “2H2025 is likely to be defined by macro asymmetry and geopolitical complexity. Investors should structure their portfolios in ways to stay liquid, diversified, carry-aware and tactically nimble — to withstand shocks but poised to seize opportunity.”
