Asian Fixed Income

Significant volatility gripped the US Treasury curve in the second quarter , as Iran war-driven inflation fears and hawkish Federal Reserve signals dominated the narrative. The selloff in Treasuries accelerated through May following stronger-than-expected inflation and labour market data, with the Federal Reserve maintaining a cautious stance on policy easing. The 10-year U.S. Treasury yield briefly reached 4.67% in May before retracing on softer inflation data and easing oil prices towards quarter-end. Over the quarter, the 10-year Treasury yield rose modestly by 15 basis points (bps) to 4.47%, masking significant intra-quarter volatility, while the 2-year Treasury yield rose 38 bps to 4.17% resulting in a flatter yield curve.¹

Asia USD investment grade credit markets remained resilient during the quarter with credit spreads tightened by 14 bps supported by stable corporate fundamentals, improving rating trends and favourable net negative bond supply conditions. In China, Moody's upgraded China’s banking sector outlook to stable from negative, citing continued policy support and stable economic growth prospects. In India, governance concerns surrounding the Adani Group eased following the resolution of legal proceedings involving founder Gautam Adani. Standard and Poor (S&P) upgraded Adani Ports to BBB with a stable outlook, reflecting strong operating cash flow generation and healthy leverage metrics, while Bharti Airtel was upgraded to BBB+ on the back of continued growth in data consumption and improving business fundamentals. Elsewhere in Southeast Asia, Moody’s revised Thailand sovereign outlook to stable from negative with easing tariff risks and improved domestic investment. Fitch revised PTT Global Chemical's outlook to negative due to persistent petrochemical oversupply, while Moody's revised Thai Oil's outlook to stable following reduced project execution risks. In Malaysia, Genting Overseas Holdings issued US$1.25 billion of perpetual securities to refinance existing obligations and preserve investment grade credit metrics. Indonesia remained a key focus after both Moody's and Fitch revised the sovereign outlook to negative while affirming its investment grade ratings, citing concerns around governance, fiscal policy and external vulnerabilities. Investor attention also centred on potential implications on policies involving sovereign wealth fund Danantara and state-owned banks. Similarly, Fitch revised the Philippines' sovereign outlook to negative, citing risks to medium-term growth stemming from weaker public investment and higher energy prices. 

Across broader Asia Pacific, S&P downgraded Japan’s NTT to BBB+ due to slower profit recovery in its core telecommunications business and continued elevated capital expenditure. In Australia, Moody's revised Santos's outlook to positive in May 2026, with an upgrade anticipated within the next 12 months with successful ramp-ups of its oil and gas projects.

Performance in Asian USD high yield markets continued to be driven largely by issuer- and country-specific developments. Within China’s property sector, Moody's downgraded Longfor to B1, citing elevated leverage and weak property development activity. Moody’s also downgraded China Jinmao to Ba3 on its slow progress in deleveraging while S&P revised Seazen Holdings' outlook to B- stable from negative outlook, reflecting manageable liquidity risks and improving access to offshore funding markets. Outside the property sector, West China Cement underperformed amid concerns surrounding the Ebola outbreak in parts of Central Africa, where the company has significant operations, as well as potential index exclusion risk. In Macau, casino operator SJM Holdings was downgraded by both Fitch and Moody's due to slower-than-expected deleveraging and a weaker earnings recovery. In Japan, Kioxia Holdings was upgraded to investment grade by both S&P and Fitch, supported by stronger earnings prospects driven by Artificial Intelligence (AI)-related demand for memory capabilities. In India, Vedanta Resources received upgrades from all three major rating agencies, reflecting stronger commodity prices, improved operating performance, and enhanced access to funding markets.

In Indonesia, Adaro Resources' outlook was revised to negative following the revision of Indonesia's sovereign outlook, while coal producer Indika Energy completed a US$100 million bond tap to bolster liquidity and support growth investments. Investors also remained focused on potential policy changes affecting Indonesia's mining sector, including proposals to centralise commodity exports through a state-owned entity and the possibility of higher royalties and export taxes. Among high-yield sovereigns, Pakistan's credit profile continued to improve on the back of stronger fiscal performance and ongoing external financing support. Meanwhile, Sri Lanka benefited from easing inflationary pressures, improving external balances, and continued progress in its economic stabilisation efforts.
 

Global / US

The US-Iran war has now moved into a “political theater” stage, whereby official statements, military posturing, and public ultimatums are largely symbolic, meant to project intensity rather than reflect genuine steps toward resolution. Even as inflation risks stemming from the US-Iran war keep the Fed on hold for longer, our core view of a slowing U.S. growth trajectory remains unchanged.

It is important to remember that the U.S. economy had already begun to exhibit signs of fatigue beneath otherwise resilient headline growth figures. Labor-market indicators have softened noticeably, and consumption strength is increasingly concentrated among higher-income cohorts rather than the middle-income households that typically underpin broad-based demand. With pandemic-era savings exhausted and fiscal transfers largely normalized, lower- to middle-income households no longer possess the buffers that previously supported elevated spending. The squeeze on household budgets is itself a disinflationary force — constrained consumers simply spend less. Hiking rates would be a mistake.

One underappreciated risk for the second half of the year is a regime change at the Fed under incoming Chair Kevin Warsh. We expect a greater emphasis on forward-looking indicators rather than backward-looking inflation data. Should the Fed adopt a different framework for assessing inflation, markets may find that underlying price pressures are lower than currently perceived, creating scope for a more dovish policy path than is presently priced.

We also expect policymakers to remain focused on lowering long-end borrowing costs. While fiscal concerns may keep yields elevated, there is growing incentive for both the Fed and Treasury to encourage lower long-end rates should growth continue to weaken.

Asia

China’s recovery, while gaining traction, remains uneven and fragile. Growth momentum show signs of stabilizing, but employment remains subdued, and deflationary pressures linger. Trade tensions persist, and as more regions expand anti-dumping measures against China, monetary easing alone may not be sufficient to reinvigorate activity. We believe additional monetary and fiscal measures will be essential to stabilizing growth.

For the Bank of Japan (BOJ), we continue to expect policy rates to move toward 1.5–2%, with 10-year Japanese Government Bond (JGB) yields likely settling between 2–2.5%. Notably, 30-year JGBs remain attractively valued, as Japan maintains the steepest yield curve among developed markets. In our view, the case for continued policy normalization remains intact. One of the key events for the second half of the year will be further BOJ tightening, which should accelerate the unwinding of yen carry trades. Given the scale of global positioning built around low Japanese rates, this remains a powerful tailwind for yen appreciation.

As we recently published, the effects of oil supply disruptions arising from the US-Iran war have been uneven across Asia. Broadly, Asian markets appear resilient enough to withstand the initial geopolitical shock, with near-term fundamentals largely intact. However, the longer-term impact is still uncertain, and rising food prices could become a bigger concern, especially if weather conditions continue to hurt crop production.. We remain watchful of idiosyncratic issues such as Indonesia’s fiscal concerns and the Philippines’ energy challenges. At the same time, other parts of Asia are poised to benefit from AI-related investments, while China+1 strategies adopted by the US and Europe could drive increased manufacturing investment in parts of Southeast Asia, particularly Malaysia and Vietnam.

Credit

Credit spreads have largely retraced all of the widening seen since the war began. We continue to view the risk-reward profile as asymmetric, with heightened geopolitical tensions increasing the likelihood of abrupt risk-off episodes. Although Asian credit remains broadly resilient and carry continues to be the dominant driver of returns, pockets of the market exposed to oil prices and the Middle East have become increasingly vulnerable to near-term volatility.

In this environment, we remain highly selective—reducing exposure to weaker segments while favouring idiosyncratic issuers with robust fundamentals that can better withstand external shocks. Such issuers remain capable of delivering compelling risk-adjusted returns even as the broader geopolitical landscape becomes more unsettled.

Currencies

While a stronger US dollar remains the dominant market theme, supported by expectations of higher US interest rates, we expect the dollar to weaken over the longer term as underlying economic softness becomes increasingly evident beneath resilient headline data. A potential transition to a Warsh-led Federal Reserve, with a greater emphasis on forward-looking growth indicators and a lower policy rate trajectory, could further reinforce the trend toward a weaker US dollar.

The outlook for the Japanese yen remains more nuanced. Expansionary fiscal policy and still-accommodative monetary conditions are likely to keep upward pressure on Japanese government bond yields and term premia, factors that have weighed on the yen over the past year. Nevertheless, we believe the yen remains undervalued, and rising Japanese interest rates could improve the attractiveness of Japanese assets, creating investment opportunities in Japan over the medium term.

Source: First Sentier Investors as at 30 June 2026

¹ Source: Bloomberg, as at 30 June 2026.