EM bonds looking good despite headwinds

CAUTIOUS optimism is shaping investor sentiment in 2026, with emerging market (EM) bonds expected to benefit from supportive policies and resilient technicals despite slowing global growth and ongoing trade frictions.

Danny Tan, head of fixed income at Eastspring Singapore, believes that Asian central banks’ accommodative stance, backed by moderating inflation and high real yields, should help support bonds in the region.

In general, monetary policy across major economies, including Asia and EMs, is expected to remain accommodative, cushioning headwinds from late-cycle dynamics and tariff pressures.

Tan notes that the US Federal Reserve’s (Fed) rate cuts in September and October, along with further anticipated easing, also create room for Asia and EM central banks to ease without triggering currency instability.

Asia and EM credit spreads are currently at multi-year tights, but all-in yields remain reasonable by historical standards, helping to sustain investor demand.

In Asia, low bond supply, particularly from China, means technicals are likely to remain strong heading into 2026, providing support to credit spreads.

Rising government debt and fiscal largesse across developed and emerging markets have also pushed term premia higher, improving valuations.

“We remain constructive on both US dollar and local currency duration and look to add duration when rates spike higher.

“We also like cross-currency basis opportunities (such as buying non-US dollar bonds and hedging them to US dollar for US dollar-based portfolios),” Tan argues.

This approach can enhance yield, increase diversification, and reduce volatility, while nimble investors can exploit volatility from shifting expectations over further Fed easing.

Rong Ren Goh, portfolio manager at Eastspring Singapore, sees selective high-yield opportunities across Asia. He notes that there is an under-appreciation of how the structural rise in domestic investor participation, especially in Indonesia and India, has helped to lower the volatility in these bond markets.

Elsewhere, the Australian credit market offers attractive spreads and a steeper credit curve, while Japanese government bonds, hedged appropriately, also provide compelling yields.

Currency positions

Currency dynamics remain a key factor. Eastspring expects the US dollar to continue a weakening trend as its carry advantage erodes, supporting non-US dollar currencies. Consolidation in EM currencies sets the stage for renewed appreciation, supporting a bias towards short US dollar positions.

Meanwhile, the Chinese yuan is expected to stay stable or grind slightly lower, helping anchor Asian currencies.

Eric Fang, portfolio manager at Eastspring Singapore, prefers EM sovereigns over corporates, as “the sovereign rating upgrade trend and momentum remain strong.” Combining fundamental views on EM currencies and rates, he believes selected EM local currency bond markets have the potential to deliver double-digit returns in 2026.

Trade tensions have yet to severely impact margins, thanks to front-loading activities and differing ways tariffs are absorbed globally.

Clement Chong, head of fixed income research at Eastspring Singapore, points out that the risk to corporate margins is tilted to the downside although cost-saving or efficiency-enhancing initiatives can help mitigate. Credit selection, therefore, becomes critical.

Within investment-grade bonds, Eastspring favours quasi-sovereigns and corporates in defensive sectors, such as Internet, telecommunications, banks and utilities.

In Asia Pacific, Japan and Australia’s corporates and banks are particularly attractive, alongside opportunities in Saudi Arabian banks and Latin American quasi-sovereigns.

Singapore an outperformer

Singapore’s bond market remains a standout performer. The Singapore dollar bond market was one of the best performing in 2025, outpacing the US bond market.

Wei Ming Cheong, portfolio manager at Eastspring Singapore, expects Singapore dollar rates and credits to consolidate after last year’s strong performance, noting that the Fed’s easing plus flushed domestic liquidity should limit the upside in Singapore dollar rates.

Eastspring remains constructive on duration and prefers high-quality corporate bonds along a relatively steep credit curve, while domestic demand from retail and high net worth investors should continue to support the market.

Benedict Phua, also a portfolio manager at Eastspring Singapore, says this backdrop is likely to prevail, at least over the near future.

After net negative supply in 2023 and 2024, Singapore dollar bond issuance picked up in the third quarter of 2025, creating slightly positive net supply by September. The growth and depth of the market has also drawn new global issuers seeking diversification.

Following the Monetary Authority of Singapore’s decision to maintain its Singapore dollar policy in October 2025, the central bank remains in a “wait-and-see” mode amid stronger-than-expected growth and moderating inflation.

Eastspring expects 2026 to see Singapore’s growth near trend, with inflation rising but remaining below historical averages.

While uncertainties around US trade policy could weigh on the economy and the Singapore dollar, Singapore’s external position remains robust and banks continue to enjoy strong asset quality and capital levels.

Overall, Eastspring’s outlook for EM and Asian bonds in 2026 is constructive, combining supportive policy, reasonable yields, and strong technicals with selective opportunities in high-quality credit and local currency markets.

For investors willing to stay nimble and focus on credit selection, this new year offers avenues for yield and diversification in an environment of moderating growth and evolving global trade dynamics.