Asian bonds ride the swell

THE winds of change are blowing through global bond markets, and many fund managers believe the next big gains may not be found in New York or Frankfurt, but in Mumbai, Manila and Seoul.

With the US dollar expected to weaken further and central banks signalling a turn in monetary cycles, international fixed income is entering a new chapter – one where Asia increasingly takes centre stage.

According to Eastspring Investments, in a world where traditional safe havens are increasingly compromised by political and macroeconomic uncertainty, Asian bonds stand out as a resilient and rewarding alternative.

The fund manager argues that the case for looking eastward rests on two planks: higher real yields and the likelihood of regional rate cuts that can support local markets.

“Asian central banks’ expected rate cuts over the next 12 to 18 months should also help to underpin local bond markets,” it explains.

Charles Schwab Corp, meanwhile, has zeroed in on the US dollar’s trajectory.

“International bond performance has benefitted from a weaker US dollar this year,” the investment management company notes.

“With that weakness expected to continue, the outlook for international developed-market bonds is more positive than it has been over the past decade,” it adds.

The notion is that if one believes the US dollar has further to fall, global, and especially Asian, bonds could deliver stronger returns than their developed market peers.

For DBS Bank, the opportunity is about structural contrasts.

“Key debt markets in Asia are devoid of such headwinds (plaguing developed markets) presently.

“Long-term rates are on a declining path, with no major concerns regarding inflation fighting credibility of central banks or public sector debt sustainability,” the banking group points out.

It highlights that exchange-rate dynamics in the region remain supported by geopolitical stability and steady external flows, in stark contrast to the policy scepticism plaguing the US and parts of Europe.

Currency matters

Eastspring stresses that despite delivering compelling returns year-to-date versus developed market bonds, Asian fixed income is still not getting the attention it deserves.

One reason is perception, it notes, with many global investors still filing Asia under “emerging markets” rather than treating it as a stand-alone allocation.

Yet, US fiscal worries are mounting, from ballooning deficits to uncertainty over the US Federal Reserve’s (Fed) independence.

Eastspring cautions that “the US dollar’s longer-term trajectory is potentially clouded by the widening US fiscal deficit, US President Donald Trump’s choice of Fed chair in June 2026 and any developments that could undermine perceptions of Fed independence in the lead-up.

Currency is at the heart of the debate.

Charles Schwab emphasises that “the outlook for a weaker US dollar is important for the global bond outlook because currency movements tend to have an outsized effect on global bond investment performance.”

Investors may fret about bond spreads and coupon returns, but in practice, large swings in currencies matter more.

The group expects the Fed to start trimming rates later this year, a shift that could erode the yield advantage the United States enjoys over international peers.

Eastspring goes a step further, pointing to the weight of foreign holdings in US assets.

“Currently, the sheer size of outstanding foreign holdings of US portfolio assets implies that even small changes in the foreign-exchange hedge ratio can have a significant currency impact,” it says.

The upshot is that investors are less willing to keep piling into US paper.

Recent positioning data shows a shift that investors have turned short US dollar over the second quarter of this year, from neutral at the end of the first quarter, and long at the start of the year, it notes.

Even if global investors reduce exposure to the greenback only gradually, Asia offers enough technical support to stand on its own.

Eastspring highlights that for US dollar-based investors looking to diversify away from US assets, Asian US dollar bonds offer supportive technicals and still-attractive all-in yields.

Importantly, it stresses, Asia’s investment-grade credits have historically generated better risk-adjusted returns than their US equivalents, while volatility has been lower outside of systemic shocks such as the 2008/09 global financial crisis and 2019/20 Covid-19 pandemic.

On the local currency side, yields across Asia are unusually compelling.

“For investors looking to diversify away from the US dollar, subdued inflation as well as higher real yields in Asia make a compelling case for Asian local currency bonds,” says Eastspring.

Central banks in India, the Philippines and other economies are projected to trim rates over the next year, creating scope for active managers to play duration and currency differentials.

Real yields are already running well above historical averages, with India standing out based on its real yield at 2.5 times standard deviation above its five-year average or 1.5 times standard deviation above its 10-year average.

Liquidity factor

Liquidity is another overlooked factor.

Eastspring observes that falling short-term money market rates since the beginning of 2025 across key Asian economies reflect flush liquidity conditions and have resulted in strong demand for Asian duration.

China’s offshore yuan (CNH) market is a prime example, now supported by rising domestic demand and a growing roster of high-quality issuers.

“CNH bond liquidity has also improved significantly, boosted by increased issuances from high quality companies looking to capitalise on cheap funding and the interest from Chinese investors,” it reports.

Yet, not all is straightforward.

Charles Schwab reminds investors that international bonds often come with lower income payments than US equivalents.

“The roughly 180-basis-point (1.8%) advantage that the US Agg offers is at the high end of its 15-year range,” it notes, underscoring that those who want higher coupons might struggle abroad unless currency gains compensate.

Still, it believes the conditions are aligning.

“The outlook for international bonds investments is more attractive than it has been in a while, given our outlook for a weaker US dollar,” it highlights.

DBS, for its part, views Asia as a relative safe harbour at a time when developed markets are showing cracks.

It warns that “curve steepening, as opposed to flattening, during a rate cut cycle is problematic. They reflect the market’s scepticism about policy efficacy.”

That scepticism is alive in the United States and Europe but absent in Asia, where central banks are seen as credible and fiscal risks less alarming.