Favourable macroeconomic forces support the outlook for hard-currency Asia credit. Expected cuts in US interest rates, robust regional growth and easing monetary policies support the opportunity set. They could also encourage potentially significant capital repatriation amid stronger intra-region trading, leading to spread tightening.
As active investors in USD-denominated Asia credit through our Asia Value Bond, Asia Investment Grade and Asia Diversified High Yield strategies, we provide our macro outlook for H2 – with a focus on US interest rates and regional policy and growth dynamics.
How could US rates impact fixed-income markets?
US interest rates have been notably volatile in recent years. Over the past 12 months, the 10-year US Treasury yield ranged from 3.6% in September to 4.8% in January. A 120 bps move can impact a fixed-income portfolio with a six-year duration by about 7.2%, highlighting the importance of the rates outlook for investors.
In H1, the Federal Reserve (Fed) continued to pause amid uncertainty from Donald Trump’s tariff policies and deregulation agenda. The Fed acknowledges that policy remains tight, well above the neutral rate. As inflation and growth data emerge in July and August, we expect the Fed to gain confidence to begin cutting rates. Over the next year, we expect the Fed funds rate to decline from 4.25-4.5% to 3.-–3.75%, offering a strong anchor for fixed-income portfolios.
At the long end of the curve, elevated term premiums reflect fiscal concerns. However, demand-side support (e.g., an easing of the Supplementary Leverage Ratio, a key capital requirement for banks) and a shift toward Treasury bill issuance may help stabilise long-term yields. Our key views are as follows:
- The Fed is likely to start cutting rates in September or October 2025, targeting 3.5% by mid-2026
- With the 10-year yield near 4.35%, investors have an attractive entry point. We expect it to settle between 4.00-4.25% by year-end.
- Long-dated Treasuries, especially 30-year bonds, offer value amid high term premiums and sub-2% US GDP growth expectations. The Treasury curve remains inverted, with two- and five-year yields already below the Fed funds rate. The 5s30s curve at 100 bps appears too wide for the current cycle.
- Once rate cuts begin, hedging dynamics for global investors should support returns on USD assets for European and Asian investors.
Read also: Asia credit to weather US tariffs as trade war strengthens long-term growth drivers
Asia macro outlook
Asia’s macro backdrop is supportive of risk assets. Anticipated US rate cuts and a weaker dollar give Asian central banks room to ease, while domestic liquidity remains strong. With resilient local growth drivers, the region is less dependent on the US for growth momentum.
In our view, the key drivers of the positive support for risk assets in Asia are:
- USD weakness supporting intra-Asian flows and repatriation of assets to the region
- Lower domestic rates as Asian central banks cut with the Fed and FX allows easing
- Easy credit conditions with low funding costs supporting corporate borrowing
- Reduced Asia-USD issuance creates supply-demand imbalance
- Capital redeployment as uninvested capital shifts from low-yielding domestic assets to Asia-USD markets
We are particularly constructive on India: the Reserve Bank of India has already cut policy rates by 75 basis points this year to support growth, and we believe it should be able to go further.
FIG 1. Key rate and FX trends across Asia1
As US credit faces tight valuations and policy uncertainty, we expect capital to shift toward Asia in H2 2025 – especially from Asian institutions and wealth managers. Since 2020, major Asian investors have added around USD 1 trillion in foreign bonds. A slowdown or partial reallocation to Asia by local and emerging-market investors could tighten USD-denominated credit spreads regionally.
Read also: Asia fixed income: a promising outlook for 2025
FIG 2. Estimated allocations by Asian investors to overseas bonds (USD mn)2
Reallocation to Asia by local and emerging-market investors could tighten USD-denominated credit spreads regionally.
A constructive H2 outlook
With US rates on an anticipated downward trajectory, regional growth prospects strong and the policy environment accommodative, the macro fundamentals for hard-currency Asia credit are favourable. Prospects for a potentially sizeable repatriation of capital to local markets, amid greater intra-regional flows, strengthen the outlook.
Learn more about Asia Value Bond – our dynamic approach to Asia hard-currency credit
