Asian local currency bonds have delivered strong performance during the past five years compared with to other major bond markets, demonstrating remarkable resilience, according to Chris Wong, investment director for fixed income at Schroders.
The Markit iBoxx Asia Local Bond Index has achieved a cumulative return of 14.8% in US dollar, outperforming the Bloomberg Global, US, and Pan European Aggregate Indices, which returned -4.1%, 1.7%, and -8.5%, respectively, in US dollar terms.
As Wong points out, the Asian domestic bond market consists largely of government bonds and quasi-sovereign issuers, boasting a high average sovereign rating because of favourable credit metrics, such as debt-to-GDP ratios, external debt ratios, current account balances, foreign direct investments, and growth prospects.
Beyond those inherent macro features, Wong identifies five specific reasons why the strength and resilience of Asian local currency bond markets is likely to persist.
First, Asian rates are set to benefit from the US Federal Reserve’s rate-cutting cycle, as central banks in the region are likely to follow suit with policy rate cuts, as inflation has returned to target levels in most countries, and real rates are starting to look high.
Second, the US Federal reserve is showing limited tolerance for further labour market cooling, so with easing cycle underway, Wong sees scope for the US dollar to soften as US-Asia rate differentials narrow.
Third, Asian growth is expected to be resilient, driven by continued disinflation, monetary easing, fiscal stimulus and tech-driven export upswing.
“The outlook for Southeast Asia is particularly positive, as the region benefits from advantageous trade dynamics due to its downstream positioning in the IT, AI, and electronics supply chains,” said Wong in an investment note.
Fourth, there is increasing recognition of the sector by international investors through index inclusion.
For instance, the inclusion of China government bonds in the three major bond indices (Bloomberg Global Aggregate, JPMorgan GBI-EM, FTSE WGBI) has been completed. India’s inclusion in the JP Morgan Global Bond Index-Emerging Markets (GBI-EM) index started in June 2024, while South Korea’s inclusion into the FTSE Russell World Government Bond Index (WGBI) will start in November 2025.
“Asian local currency government bonds are well-positioned to attract structural inflows from global investors, who remain under-allocated to this asset class,” said Wong.
Finally, there are attractive risk-adjusted returns with low correlation to other bond markets, he noted.
Relatively low inflation has resulted in lower volatility in Asian rates and has partly contributed to their outperformance relative to other government bond markets.
“The low correlation with other markets also makes this asset class a potentially attractive tool for diversifying risks in a broad aggregated portfolio,” Wong concluded.
