As tariff headlines are expected to raise market volatility in 2025, the attractive yields and steady income stream from high quality Asian bonds should appeal to investors, according to Rong Ren Goh, fixed income portfolio manager at Eastspring Investments.
“Tariff risks are delayed, not eliminated. While equity and bond market volatility has been relatively subdued to date, higher volatility cannot be ruled out when markets refocus on tariffs in the coming months,” noted Goh.
However, high quality Asian bonds offer investors the opportunity to lock in attractive income streams that can help temper portfolio volatility.
“Given tight spreads and a shallower than expected US rate cutting cycle, carry would be key for bond returns in 2025.”
Asian bonds, as measured by the JP Morgan Asia Credit Index (JACI), have delivered positive returns year to date, following strong returns in 2024. US and Asian bond yields had initially risen post the US election as the market focused on the prospects of stronger US economic growth, higher inflation and bigger US fiscal deficits. US 10-year Treasury yields hit a high of 4.8% in mid-January 2025.
Now, “we look for opportunities to extend duration when yields spike, but for now, shorter duration credits pay us for waiting and they offer ample liquidity should risk aversion rises. Within Asian investment grades, AA and BBB-rated bonds appear to offer better value,” said Goh.
Investment grade bonds offer the best value, as tight credit spreads do not compensate investors adequately to take on more risk. “We are staying defensive, and we look to re-engage when spreads widen,” said Goh.
Eastspring is positive on the fundamental outlook for the internet, telecoms, transport and consumer sectors. It also likes Australian and Japanese financials.
However, it is also cautious about being overly bearish China, because the country’s share of US imports has fallen since the first Trump administration, making it less vulnerable. Chinese policymakers also appear to be increasingly willing to provide stimulus and other supportive measures.
“With market pricing still reflecting extreme investor pessimism towards China, there could be opportunities for investors to position themselves for a recovery,” said Goh.
Nevertheless, as a whole, the region’s stable macro fundamentals and net negative supply of corporate bonds in 2025 should underpin the Asian bond market. Credit selection will be key in driving alpha generation as tariffs produce winners and losers, he noted.
“Dispersion will remain high among local currency bond markets. Investors can unlock significant value by capitalising on market dislocations, leveraging Asian central banks’ rate cut cycles and navigating geopolitical risks,” said Goh.
