Asia fixed income: a promising outlook for 2025

Dhiraj Bajaj - CIO, Asia Fixed Income and Equities
Dhiraj Bajaj
CIO, Asia Fixed Income and Equities
Sheau-Yien Wang - Director of Business Development, South Asia
Sheau-Yien Wang
Director of Business Development, South Asia

key takeaways.

  • Our outlook on Asian and emerging-market debt is positive, driven by the strong fundamentals of resilient growth and subdued inflation in the region
  • We see China as reasonably insulated from US tariffs and believe investors have underappreciated several positive developments in the country. India is the biggest emerging-market opportunity at the moment, in our view
  • We aim to take advantage of market mispricing, as we believe expectations for the Federal Reserve’s stance are currently too pessimistic.

The outlook for Asia’s fixed-income markets in 2025 is promising, with a range of macro factors underpinning the asset class. We view Asia credit as likely to outperform developed-market credit in 2025, benefiting from a higher credit spread opportunities, resilient fundamentals and under-allocation from global investors. 

Like most other major markets, Asian bonds are influenced to an extent by the monetary stance of the Federal Reserve (Fed). While we are predicting two or three interest rate cuts from the Fed through 2025 and 2026, our expectations of a gradual cutting cycle have not been reflected in the pricing of Treasuries lately. 

Following a sell-off in late 2024, the 2-year Treasury yield, for example, recently stood at 4.3% – the same level as the current Fed funds rate. The yield curve implies that no cuts from the Fed are expected in the next two years. This is a mispricing, in our view, and creates major opportunities in areas of Asian and emerging market (EM) hard-currency credit. Asian EM investment-grade (IG) debt opportunities, for example, are currently yielding a substantial 6-6.5%. 

America sneezes – Asia shrugs? 

Predictions of the impact of a hawkish US are understandable, if overdone. Certainly, President Trump has been expected to take a hard-line approach to China, having promised to hit the country with expanded import tariffs. But we view Asian and emerging-market bonds as reasonably well-insulated from a protectionist US, in light of strong domestic funding capacity and already high Treasury yields. Asian central banks are also in a comfortable position, with little pressure to change rates from current levels. 

Read also: Higher US tariffs: winners and losers

From a growth perspective, our outlook for Asian and emerging markets is similarly sanguine. For China, direct imports into the US make up less than 2.5% - not a negligible amount, but a far cry from the highs of over 8% seen around 2007. China’s trade with emerging markets and the Global South ecosystem are now much more meaningful for its economy. This should soften the impact of ramped-up tariffs applied by the US. 

Market observers will not have failed to notice the bearish consensus that has formed around China and various emerging markets – a view that we feel does not reflect the supportive technical picture. Headlines about Trump tariffs, slowing growth and aging demographics are a natural focus for investors with regards to China. However, less attention had been paid to China’s successful transition away from its previously imbalanced, real estate-centric economy to a new model prioritising a wider selection of sectors, especially advanced technology. 

There are other areas that investors have underappreciated: the tech leadership that China is spearheading; policymakers’ willingness to support the economy; and the potential for domestic consumption to rise after a period of weakness. We view these factors as highly encouraging for corporate credit and investment sentiment, and we are aligning our credit strategies accordingly. 

India’s powerful narrative

Market participants have a better read on India, where few dispute the powerful growth narrative driving investment. India’s economy has grown consistently since 2021, and we expect it to double in size over the next seven or eight years. For fixed-income investors, India offers an attractive stable of issuers, which themselves have diversified funding channels both domestically and in the global dollar bond market – i.e., no overreliance on dollar debt markets for long-term funding. 

We expect Indian debt to remain one of our largest allocations, especially in high-yield (HY) segments, where we can choose from a wide variety of infrastructure, renewables, commodities and financials issuers. 

FIG 1. Doubling of India’s nominal GDP expected over next decade1

In the emerging-market HY frontier segment, we have a positive view on Sri Lankan credit. The country has undertaken a successful debt-restructuring programme, introducing ‘macro-linked’ bonds that could produce upside returns. 

We also favour Pakistan. Despite facing domestic challenges, the Pakistani government is pursuing structural reforms under a loan agreement with the International Monetary Fund. The country’s foreign-exchange reserves now stand at over USD 11 billion, and external balances have improved notably. 

Egypt and Nigeria

Finally, we also hold a positive view of Egyptian and Nigerian debt. Egyptian credit has benefited significantly from a major regional investment package from the Gulf Cooperation Council. Meanwhile, the Tinubu government in Nigeria has outlined a reform agenda that should drive supportive macro rebalancing. 

Overall, despite the strong market returns of 2023 and 2024, dollar-denominated yields are still high: diversified portfolios are able to yield over 6% for IG, around 7.5% for IG-HY blended and over 9% for HY. 

This is a reasonably rich starting point for income generation, as well as modest yield compression, as the Fed trims interest rates further over 2025-2026 and Asia-EM economies continue their growth path and healthy credit cycle. 
 

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1 LOIM, CEIC, Nomura Research, UBS Research. As at June 2024. For illustrative purposes only.

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