Fixed income
Weathering the storm: The resilience of Asian fixed income
6 min read 1 Apr 26
Follow us
Confronted with ongoing geopolitical tensions, we believe Asia’s fundamental strengths should underpin the resilience of its fixed income markets. Supported by strong current account balances and the support of the AI capex cycle, many Asian countries look set to weather the current storm relatively well compared to prior crises.
As investors reassess risks across global bond markets, Asia stands out in our view as a market anchored in quality, bolstered by market technicals and favourable structural trends.
Weathering the oil shock
As the US’s war with Iran continues, fears of a lasting impact on global oil prices are rising. As such, investor concerns are turning to energy-importing countries, believed to be vulnerable to an inflationary shock. Asia in particular is perceived to be exposed to this. However, Asia’s oil intensity (the oil consumption per unit of GDP) has fallen meaningfully over the years. Additionally, comparing individual country current account balances as a percentage of GDP versus their oil and gas imports, we can see that most of Asia runs a comfortable current account surplus. As such, we believe that these countries have inherent buffers against the prospect of high costs of oil imports. In fact, while the Korean won has been the worst performing currency, it has one of the largest current account surpluses in Asia. Despite market fears, we believe that fundamentals should eventually prevail when the dust settles.
Many have drawn parallels between the current crisis and the experience of 2022. However, a key difference between 2022, and even earlier oil crises, such as the 1980s, is that Asia’s performance today is anchored in the AI capex cycle. Asia is integral to the production of semiconductors and to the electrical computing component manufacturing chain. As a result, this has helped provide a cushion to Asian currencies, which have weakened between 2 and 5% against the dollar since the war started, compared to a fall of 10% in 2022.
“A key difference between 2022, and even earlier oil crises, is that Asia’s performance today is anchored in the AI capex cycle.”
This is also a reflection of underlying market technicals; global investors have generally maintained an underweight position in Asian currencies and therefore investor positioning has been light. This has helped limit the impact from subsequent de‑risking flows.
Similarly to global bonds, Asian bond yields have risen across the board, with rate hikes being priced into markets. However, we believe that relative to Europe or the UK, Asia is in a better position to push back against rate hike expectations. Firstly, inflationary pressures in Asia have typically been more measured. Even during the pandemic, Asia did not experience runaway inflation, hence inflation expectations are well-anchored allowing Asian central banks more room to manage this as a one-off supply side shock. Secondly, most Asian countries have been experiencing lower than target inflation going into the US-Iran conflict. Therefore, if we do see a large inflationary spike due to oil price staying in the low‑US$100/bbl range, this would bring inflation merely to the top end of central banks’ target range. We believe it is unlikely that we will see widespread rate hikes across Asia in this scenario. In fixed income, value is the key driver of returns over time. We believe pricing in Asia is at extreme levels – with rate hikes priced in that we do not believe will transpire. As such, this provides an opportunity for us as active investors.
The turning tide on the dollar
One of the key trends that has underscored the performance of Asian fixed income in 2025 was the de-dollarisation trend. As is fairly typical in times of crisis, the flight to safe havens has seen the dollar strengthen. However, we think this is only a temporary reversal of the weakening USD trend.
Exporters and corporates in Asia, as of last year, were still holding record dollar deposits, as they offer higher interest rates than on local currency deposits. However, we believe this interest rate differential will narrow. The mindset has changed from the belief that the dollar will always strengthen to thinking that Asian currencies will appreciate against the dollar. There is an impetus to start converting these deposits back into local currencies.
“The mindset has changed from the belief that the dollar will always strengthen to thinking that Asian currencies will appreciate against the dollar.”
This is supported by recent actions of China’s central bank which has shifted its currency management to one of currency appreciation. The renminbi is clearly demonstrating appreciation against the dollar and China typically leads other Asian currencies. Hence, once we have visibility towards stabilisation, we think other Asian central banks could be influenced to allow their currencies to follow the path of the renminbi. This is very different to the past where they operated on a belief that a weak currency would result in stronger exports. Now, particularly considering the oil price shock, central banks will welcome a stronger currency to limit inflation pressures. The last thing they want is to have to hike interest rates into an oil price shock.
Anchored in quality
Underscoring Asia’s resilience is the quality of its fixed income market. While many investors may consider Asian bond markets as somewhat risky given the legacy of the Chinese property crisis, this is a misconception. At less than 1% of Asian dollar denominated debt, China high yield real estate is a small sliver of what is otherwise a high quality market.
The $1 trillion denominated Asian debt market is essentially an investment grade market with the average rating of BBB+. Furthermore, between 60-70% of the issuers have ratings very closely tied to the sovereign, providing a stable anchor – with most Asian sovereigns being investment grade quality.
The Asian local currency bond market is much bigger, at under $12 trillion, with a very high quality rating of A, largely thanks to the higher proportion of government debt. However, this market also contains a 10% exposure to onshore corporates; it is this component that allows us to benefit from carry and mitigate volatility in local rates.
“The Asia dollar-denominated investment grade market has demonstrated lower volatility than US Treasuries over the last 10 years, while delivering higher returns.”
Historically, the Asia dollar-denominated investment grade market has demonstrated lower volatility than US Treasuries over the last 10 years, while delivering higher returns. In part, this is because dollar-denominated Asian debt tends to be shorter duration compared to the US Treasuries, while benefiting from higher yield pick-up. Meanwhile, the Asian local currency market demonstrates similar volatility as global government bonds but at a higher return over the last 10 years. These favourable historical risk-return profiles are reflections of the markets’ defensive characteristics, while providing investors with reasonable yield pick-up over time.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
