Asian Fixed Income outlook – Q2 2025

The 10-year U.S. Treasury yield ended at 4.23% in June, just 2 basis points¹ higher than the previous quarter. Despite yields looking almost stable on a quarterly basis, the period was marked by heightened geopolitical tensions, driven by tariff uncertainties and unrest in the Middle East. Meanwhile, the longer end of the US yield curve steepened, reflecting rising term premiums and growing concerns over US’ fiscal sustainability.

Fundamentals across Asian investment-grade corporates remained resilient. Earnings in Chinese TMT names were healthy, and Indian investment-grade corporates also delivered robust results across key sectors. Performance within the Asian High Yield segment was mixed, with investors showing increased selectivity toward issuers with weaker credit profiles. The JP Morgan Asia Credit Index (JACI) Investment Grade spreads ending the quarter at 120 basis points - 2 basis points tighter than where they stood at the end of Q1. The investment-grade index delivered a positive return of 1.58%, largely driven by yield income. The JP Morgan Asia Credit Index (JACI) returns 1.50% in total returns over the quarter.

In Europe, Germany’s fiscal stimulus provided a boost to investor sentiment, contributing to the euro’s outperformance against the U.S. dollar during the quarter. In Asia, the Bank of Japan maintained a cautious stance in its rate-hike cycle, reflecting concerns over the impact of tariffs on exports and consumer confidence.

Global / US

Looking ahead, the tariff war appears to be stabilising, with actual tariff rates expected to settle around 10–15%, aligning with the Trump administration’s targets. While some inflationary pressures may persist, they are likely to be transitory and offset by weakening consumption and slowing global growth.

In the U.S., concerns over fiscal sustainability and political uncertainty may keep long-end yields elevated, even if short-term rates stabilise. So far, the impact of Trump’s ambitious plans to reduce economic excesses has fallen short of expectations. If implemented, tax cuts are likely to be regressive and may not provide meaningful stimulus to middle- and lower-income segments. Combined with ongoing tariff uncertainties, we remain constructive in our overweight position in rates, as the U.S. is likely to enter a period of slow or potentially negative growth in the near term.

Deregulation, if enacted, could boost investor sentiment. However, if macroeconomic data deteriorates more sharply than anticipated, risk asset sell-offs could occur swiftly. The Federal Reserve’s next moves will be closely watched, especially if growth data continues to weaken. We maintain that the Fed is still targeting a terminal Fed funds rate in the range of 3–3.5%. The pace of rate cuts may vary, as the Fed remains data-dependent rather than forward-guided.

Asia

In Japan, the Bank of Japan is expected to proceed cautiously with rate normalisation, balancing inflation control with the need to support growth. This measured approach may continue to support the yen and attract flows into Japanese assets. The yen’s strength is driven not only by the Fed’s rate cuts but also by its role as a safe haven currency in the event of a hard landing.

China’s economic recovery is gradually gaining traction but continues to face headwinds. Growth remains weak, employment is subdued, and deflationary pressures persist. As the trade war with the U.S. continues, investors expect the Chinese government to support the economy through increased fiscal expenditure². We have long held the view that monetary easing alone is insufficient to stimulate growth; additional fiscal support is essential to revive the economy.

Asia Credit

In this environment of heightened uncertainty, the risk-reward profile for credit remains asymmetric, underscoring the need for selective positioning and close monitoring of economic indicators. Following a volatile but resilient first half of the year for the Asian credit market, we have become more discerning on risk and increasingly focused on credit fundamentals.

Most of the losses incurred around Liberation Day have been recouped, with higher-quality issuers now trading at valuations tighter than pre-sell-off levels. In emerging market corporates, valuations have rebounded following the volatility around Liberation Day. We remain selective, focusing on idiosyncratic names that offer compelling risk-adjusted returns.

Currencies

Investor sentiment is expected to continue favoring emerging market rates and currencies, especially as U.S. economic exceptionalism fades. Developed market currencies such as the Euro and Japanese yen are also likely to maintain strength against the U.S. dollar, supported by fiscal stimulus in Europe and cautious policy normalisation in Japan.

We maintain a constructive view on select local currency bonds and continue to favor diversified exposure across emerging and developed markets, with a focus on quality and liquidity.

Source : Company data, First Sentier Investors, as of July 2025

¹ A basis point (BPS) is a unit of measure used to indicate percentage changes in financial instruments.

² Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions.