As traditional safe havens are increasingly compromised by political and macroeconomic uncertainty, Asian bonds stand out as a resilient and rewarding alternative, according to Eastspring Investments fixed income portfolio managers, Rong Ren Goh, portfolio manager and Eric Fang.
“Asia local currency bonds offer attractive real yields and potential currency upside, while Asian central banks’ expected rate cuts over the next 12 to 18 months should also help to underpin local bond markets,” they wrote in a note today.
For investors looking to diversify away from US dollar assets, subdued inflation as well as higher real yields in Asia make a “compelling case for Asian local currency bonds”.
Across the region, Bloomberg estimates show that central banks are expected to cut interest rates from 15 basis points (bp) in India to 60 bp in the Philippines by 4Q 2026.
“At the same time, differing economic cycles and demand-supply dynamics provide opportunities for active bond managers to add value through duration, currency and credit management,” Eastspring said.
Meanwhile, real yields in emerging Asia have risen above historical averages, Bloomberg data shows.
India’s nominal bond yield is currently more than 420 bp above its most recent inflation figure, with its real yield at 2.5x standard deviation above its 5-year average or 1.5x standard deviation above its 10-year average.
Similarly, real yields in Philippines, Thailand, South Korea, Malaysia and Indonesia are also higher than their 5 and 10-year averages.
Concurrently, short term money market rates since the beginning of the year across key Asian economies reflect flush liquidity conditions and have resulted in strong demand for Asian duration.
“This has helped to cap yields and make local bond markets less volatile compared with developed market bonds,” Eastspring said.
Furthermore, during the past 18 to 24 months, Goh and Fang have observed a structural shift in the offshore renminbi (CNH market), characterised by rising demand, stronger liquidity and more high-quality issuers.
“Chinese investors are seeking higher carry and credit duration amid falling yields and flat yield curves in the Chinese onshore bond market,” they noted.
CNH bond liquidity has also been boosted by increased issuances from high-quality companies looking to capitalise on cheap funding and the interest from Chinese institutional investors.
But currency exposure is a major risk for investors in the domestic markets of Asia and elsewhere. The US dollar index (DXY) has fallen 6.3% year to date, and the US dollar’s longer-term trajectory is potentially clouded by the widening US fiscal deficit, President Trump’s choice of Federal Reserve chair in June 2026 and further trade uncertainties.
However, 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. In which case, there is a compelling reason for non-US investors to diversify elsewhere – not least to East Asia bonds.
