Asia Fixed Income Investment Outlook – Quarterly Update

Author: Chris Lau, Senior Portfolio Manager, Invesco Fixed Income

The Asian investment grade (IG) credit market has navigated a complex landscape in the recent months, shaped by the new US administration, regional economic dynamics, and geopolitical factors. Trump’s incoming policies and tariffs announcements were initially perceived as less fierce than anticipated, which helped overall risk sentiment. US data has been resilient in recent months and has reset a slower easing path for the Fed. Despite elevated rate volatility and policy uncertainties, Asia IG recorded a decent return year-to-date supported by strong buying interests from investors searching for yield.  

Resilient US macro data over recent months has prompted a market reassessment toward a more gradual easing trajectory for the Fed. However, emerging data highlights potential vulnerabilities in US consumer spending and the labor market. Deteriorating consumer spending, business sentiment and the recent government layoffs are bringing about fresh concerns about weakening US growth. The market is pricing in the possibility that the Fed may need to step up the pace of rate cuts to prevent further weakening in the labor market. However, given still solid inflation prints, and uncertainty about incoming tariffs, we expect it will be difficult for the Fed to cut rates aggressively.  

Asia IG spreads remained largely consolidated at the tighter end of their historical range in Q1 despite volatile rates movement. JP Morgan Asia Credit Index (JACI) IG spreads have widened +6bps to 76 basis points (as of Feb 28, 2025) from +70bps (as of Nov 8, 2024). Spread performance, however, exhibited notable divergence across individual countries. Technicals have been extremely strong despite tight valuations and escalated rates volatility. With stable fundamentals and low default rates, Asia credits remain attractive from all-in yield perspective. 

Emerging market (EM) Asia economic growth continues to increase at a healthy pace, supported by accommodative central bank policies and benign inflation. The outlook for 2025 remains positive, with expectations of resilient credit fundamentals and moderate global growth. Despite potential tariffs from the US, Asian corporate and bank credit fundamentals are expected to stay resilient. Revenue growth may see some moderation, but profit margins are likely to hold steady due to lower input costs. In addition, the leverage ratio for Asia IG corporates remains comparatively low. Conservative balance sheet management continues to provide buffer against potential economic headwinds and reinforces the creditworthiness of Asian IG issuers.

Technicals provided substantial support in Q1, driven by sustained inflows into Asia from yield-seeking investors. Demand for Asia IG credit has been buoyed by local investors, attracted by the compressed yield differentials between USD-denominated debt and local bond markets, particularly from China onshore. On the supply side, the primary market has been subdued year-to-date. The scarcity of new issuance – driven by issuers’ preference for local currency funding or the loan market has further worsened the supply-demand imbalance. We expect negative net supply to remain throughout 2025, supporting bond prices and keeping spreads relatively tight.

Subordinated debt from Asian banks and insurance companies continues to offer value, except for Hong Kong banks, whose credit fundamentals are likely to be undermined by a weakening property sector. We have started to see value in the steep credit curve as risk premiums are building up especially in the back end. Despite the trade tariffs threats, we are turning more constructive in China IG as we expect the economy to stabilize and companies to benefit from the government’s easing policy and fiscal stimulus. In addition, we believe China IG credit should continue to enjoy strong technicals driven by strong onshore buying interests. 

In conclusion, we expect US rate volatility to remain elevated and believe a more measured pace of Fed rate cuts should sustain attractive all-in yields for Asian IG credit. US policy will continue to set the tone for all asset classes in 2025. However, Asian investment grade should remain resilient given the accommodative central bank policies and resilient credit fundamentals of these economies. We think the Asian market is well-positioned when faced with challenges such as elevated US treasury yield volatility and potential tariff threats. We believe Asia IG credit will continue to deliver robust returns in 2025, mainly from yield carry. Despite the rich valuations, strong technicals in Asian credits should keep spreads tight. While we do not see scope for material spread compression in Asia IG from current levels and we believe the high all-in yields should continue to be supportive for the remainder of 2025.

Author: Norbert Ling, Portfolio Manager, Sustainable and Impact Investing, Invesco Fixed Income

In 2025 year-to-date, Asia high yield (HY) markets have continued to outperform relative to US and European HY markets. This stability in performance reflects the higher income opportunities within Asia and a benign credit backdrop as we haven’t seen any defaults or restructuring events thus far this year. The top three contributing sectors are real estate, sovereigns, and financials, and income from these sectors contributed to around one-third of total return.

On this front, we have witnessed the return to bond markets of China HY real estate issuers that have issued bonds with an 8% coupon, indicating that financing conditions and windows are starting to open up for real estate survivors.¹

Heading into Q2, we highlight the following topics that could be of interest to investors looking at this asset class. The abundance of income opportunities and focus on 8 to 10% yield assets, selective overweight in improving fundamental sectors within Asia HY, and focus on income per unit of volatility with a bias towards high coupon.

Asia high yield continues to provide abundant income opportunities for fixed income investors

Within Asia high yield asset class, we prefer bonds that yield between 8 to 10% as these provide good total return opportunities without the volatility found in equities. Single name selection in this space is a core part of active management. Despite spread tightening over the last two years, there has been a steady pool of assets making up over 10% of the benchmark in Asia HY that consistently trade between 8 to 10% in terms of yield. Examples of bond issuers in this category include restructured sovereign bonds, commodities firms, and financials. This is where credit research and security selection are critical to the portfolio construction process in order for Asia bond funds to generate alpha versus the JPMorgan Asia Credit index. 

Asia high yield sectors continued to perform well 

The core sectors within Asia high yield that range from financials, commodities, infrastructure, renewables, and gaming, continue to perform positively from a credit perspective.

Taking Macau gaming as an example, February ‘s casino gaming revenue in Macau was up by 7.8% year-on-year in February and up by 8.2% month-on-month.²This is a conducive backdrop for HY credit investors as free cashflow generation on the back of profit recovery can help to drive deleveraging for Macau gaming bond issuers and provide potential rating upside.

Similarly, we continue to find evidence for strong capital ratios in Asian banks and see broadly stable asset quality trends. We believe that going down the capital structure in well capitalized and profitable Asian banks is the appropriate strategy to harvest risk premia and income.

Focus on volatility-adjusted income is part of portfolio construction, coupons matter

We believe in building a well-diversified portfolio that encompasses various sectors and regions with income per unit of risk as a key metric. This also means focusing on higher coupon bonds that continue to deliver a steady stream of cashflows to investors, not just focusing on yield metrics such as yield to worst or yield to maturity.

Within the Asia high yield space, we continue to see a healthy average coupon level of over 5.5% at index level even as the yield of the index has come down. This plays a role to cushion the portfolio during periods of economic and trade policy uncertainty. Lastly, during an environment of rates volatility, we see a strong case for shorter-dated high yield paper that allows investors to lock in high levels of yields among HY issuers that have strong market financing assets. For reference, the Asia HY index average duration is only at 2.6 years, which reduces its correlation with the daily movement of US treasuries.³

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.