Asian bonds set to shine as dollar dims

AS investors rethink portfolio resilience in an increasingly uncertain fiscal climate, select Asian government bonds look set to benefit from a long-standing but now accelerating pivot away from US dollar assets.

This shift in asset allocation is far from abrupt.

According to OCBC Global Markets Research, one of the key themes dominating the market across asset classes this year has been a re-allocation away from US dollar assets.

The trend, it says, is particularly evident in official foreign reserves, where central banks have been gradually reducing their US dollar exposure for decades.

The share of allocated reserves held in US dollar peaked at 72.7% back in the second quarter of 2001 (2Q01).

Fast-forward to end-2024, that figure had fallen to just 57.8%, underscoring a meaningful structural change in how global liquidity is managed.

OCBC highlights that while both reserves and private allocations span across asset classes, its research zooms in on the bond segment – specifically government bonds that can serve as substitutes for US Treasury securities (USTs).

“Foreign holdings of USTs have been falling as a percentage share of total outstanding, to around 25% as of end-1Q25, from around 34% at end-2014,” the bank notes.

Interestingly, while the absolute amount held has risen, it is the composition of holders that has shifted.

Official sector (largely central banks) share has declined, leaving private sector investors – typically more price-sensitive – to take up the slack.

Singapore stands out

So, where might this redirected demand land?

OCBC’s analysis considers a range of criteria – sovereign credit rating, market size and investment accessibility.

Its shortlist of viable alternatives includes AAA-rated or highly rated government bonds with a minimum outstanding amount of US$200bil (or US$800bil for those rated A+/A1 and above).

This list features Australia, Canada, Germany, Netherlands, Singapore, South Korea, France, the United Kingdom, China and Japan.

A broader screen, which includes bonds rated A-/A3 with at least US$300bil in size, adds Spain, Belgium, Austria, Poland and Malaysia.

Top Asian contenders are Singapore Government Securities (SGS), Korea Treasury Bonds (KTBs), and China Government Bonds (CGBs), with Malaysia Government Securities (MGS) included in the expanded universe.

OCBC highlights a clear opportunity: “We see SGS as standing out to benefit from the diversion of flows including away from the US dollar.”

Singapore ticks multiple boxes. Besides a pristine AAA rating, its government is known for fiscal prudence.

Importantly, most SGS issuance is not meant to fund spending but rather to aid market development.

This gives the Monetary Authority of Singapore the flexibility to calibrate supply in tune with market sentiment.

As of end-May 2025, total outstanding SGS stood at SG$298.9bil.

“This arrangement allows flexibility in the calibration of SGS auction sizes in reaction to prevailing market conditions,” OCBC notes.

Moreover, the inclusion of SGS in the FTSE World Government Bond Index (WGBI) since 2005 further enhances its global visibility.

Growing interest in North Asia

Over in North Asia, South Korea’s bond market is building momentum.

KTBs are set for inclusion in the FTSE WGBI from April 2026, with full weight – estimated at 2.05% – to be achieved by November the same year.

Passive inflows during this inclusion period could range from US$40bil to US$50bil, depending on assets under management assumptions.

The Korean market also features other instruments such as Monetary Stabilisation Bonds and National Housing Bonds, which further deepen the local fixed income pool.

China remains somewhat of a paradox.

While its onshore CGB market is vast – about US$4.9 trillion in size as of April 2025 – foreign participation has declined.

“Foreign holdings of CGBs as a percentage of outstanding have been largely edging down since peaking at 11.14% in January 2022,” OCBC notes, adding that the figure now stands at just 5.92%.

Nevertheless, China’s 10% weight in the WGBI means that many global funds are currently “underweight”.

“Funds are probably ‘underweight’ CGBs and there is potential for catch-up,” OCBC states.

Malaysia, while smaller in scale, has also gained recent momentum.

MGS and its syariah-compliant equivalent, Malaysian Government Investment Issues (MGII), attracted RM14.3bil in net inflows during May 2025 – marking three consecutive months of positive demand.

Together, MGS and MGII represent a total outstanding size of over RM1.2 trillion.

Attractive yields

From a yield perspective, some Asian government bonds offer attractive returns relative to their credit ratings.

“If we simply plot government bond yields (in local currency terms) against the respective credit ratings, then Australian Commonwealth Government Bonds and Government of Canada Bonds (CANs) appear to provide relatively high yields... while CGBs and Japanese Government Bonds yields appear on the low side,” OCBC writes.

For yield-hungry investors, this comparison could be compelling – especially when hedging costs or local swap spreads are taken into account.

Short-end SGS and CANs, long-end French government bonds, USTs and UK government bonds, or Gilts, all show relatively wide bond-swap spreads – an indication of potentially better risk-reward profiles when adjusted for funding costs.

However, OCBC cautions that “these comparisons are before taxes and any other regulatory or transaction-related costs.”

Fiscal sustainability

Still, the overarching rationale for diversification is not just about yield – it’s about fiscal credibility.

Concerns over the United States’ ballooning debt burden are increasingly making headlines.

“While credit ratings presumably have incorporated a set of relevant indicators... the current focus on US debt sustainability is arguably one of the triggers for this thesis of diversification,” OCBC notes.

Government debt-to-gross domestic product (GDP) ratios provide a sobering reality check.

Japan tops the chart with a ratio over 230%, followed by France and Canada, with the United States close behind.

In contrast, many Asian markets – including South Korea, China, and Malaysia – maintain debt levels around or below 100% of GDP, which may appeal to risk-conscious investors.

Singapore, again, stands apart.

“We leave out Singapore for comparison, as Singapore has a distinct feature in that most of the government borrowings are not used to fund government expenditure,” OCBC explains.

All told, the landscape is changing.

As fiscal stress weighs on the US dollar and its perceived “safe haven” status, a new class of government bonds – especially in Asia – is stepping into the spotlight.

Whether for reasons of credit diversification, fiscal prudence, or structural inclusion in benchmark indices, the case for spreading out from USTs is gaining ground.

As OCBC sums it up: “If concerns over US fiscal and debt positions linger, then the gradual diversification away from the US dollar and USTs is likely to continue.

“Selected Asian government bond markets are well positioned to benefit from inflows.”