Asian Bonds Benefit in an Evolving Economic Landscape
Several months have passed since the ‘Liberation Day’ tariffs. As the dust settles, Asian bonds are emerging as a beneficiary of the new economic order.
The US tariffs announced in April 2025 were, in some cases, so high that it effectively meant trade with certain markets would cease. This stark reality unsettled investors, triggering a slump across US stock and currency markets1. President Trump responded to this volatility by announcing a 90-day pause on the imposition of tariffs to allow for negotiations between the US and other economies. The 90-day pause is set to end on 8 July 2025, but further extensions or suspensions may be possible. Regardless, all markets except China still face a tariff rate of 10% on their imports into the US, which has been in effect since 5 April 2025.2
Many economies have already begun negotiations with the US over their ultimate rates, and some agreements have been reached. However, if they have been unable to achieve a favorable outcome, a substantial number of markets will face elevated levies when the 90-day pause ends3 .
Closer to home, ASEAN member states have confirmed that they will not implement reciprocal tariffs on US imports and wish to negotiate lower terms with the US4 .
In an unusual turn of events, this uncertainty has boosted the relative attractiveness of local-currency Asian bonds even though many of the region’s markets could be negatively affected by higher tariffs.
Which Asian Markets Are Most Affected by Tariffs?
The extent of this impact mainly depends on the amount a particular market exports to the US and the level of the tariff rate applied. The most vulnerable economies are currently Vietnam and Cambodia, which face tariffs of 46% and 49%, respectively 5 . Slightly less impacted are Thailand (37%) and Indonesia (32%) 6. Since Asian markets tend to produce many of the goods the US imports and trade deficits form part of the tariff calculation, the larger the deficit, the higher the tariff 7 .
More broadly, the US has already made or is close to making, trade deals which will determine tariff rates with several economies or trade blocs. These include Vietnam8, Japan9, the United Kingdom10 and potentially the eurozone.
Across-the-Board Declines in the US
Returning to the US and in the period following ‘Liberation Day’, equity and bond markets, as well as the dollar, all fell, which is highly unusual. In times of uncertainty, investors would typically sell shares and buy bonds11 . The purchase of US bonds and a flight-to-safety mentality among investors would generally support the US dollar12 .
The US has also seen its credit rating reduced by a leading ratings agency, which could mean that some fund managers needed to sell their US bond holdings because a particular investment mandate demands a top-level credit rating. A significant factor in the downgrade was rapidly increasing US public debt13.
Asian Bonds Have Become Relatively More Attractive
Foreign investors have been buying more Asian local-currency bonds in recent months. While interest-rate cuts in the region have been one factor driving demand, it may also be because the aforementioned shifts in the economic landscape and post-tariff uncertainty have made Asian bonds relatively more appealing.
Historically, when US government bonds have declined, it quickly fed through to a fall in Asian bond prices. In this latest US bond market retreat, Asian local-currency fixed income did not experience the same selling pressure. One commentator aptly described this situation as the Asian crisis of 1997 in reverse14. During the 1997 crisis, a sharp devaluation of the Thai baht then spread to other currencies and assets across the region. In 2025, we are witnessing capital flowing into Asia partly because investors no longer place as much confidence in the primacy of the US dollar and wish to diversify. A shift known as de-dollarization.
What Is De-Dollarization and How Will It Affect Asian Bond Markets?
Central banks hold foreign currency reserves to help manage or support the value of their domestic currencies. In recent years, central banks have been trimming the proportion of their reserves held in US dollars15 . The US dollar accounted for approximately 70% of global currency reserves in the early 2000s, but this had declined to around 57% by April 202516 .
As US-dollar dominance has waned, central banks have shifted towards holding some non-traditional reserve currencies, including the Chinese renminbi, the Australian dollar, the Canadian dollar, the Singapore dollar, and the South Korean won. This change reflects improvements in market liquidity and reserve management, which has made these non-traditional reserve currencies more attractive for central banks to hold in their reserves17 .
The emergence of several Asian currencies as non-traditional reserve currencies reflects investor confidence that these are being responsibly managed with open capital accounts, stable policies, and independent central banks18 . The knock-on effect of this confidence is an increased willingness by investors to accept currency risk when investing in Asian local-currency bonds.