We look at the underlying factors driving the impressive performance of Asian local-currency bonds in 2025 and assess why the asset class is likely to retain its appeal.
The relative appeal of Asian bonds compared to those of the US, Japan, and other developed markets has increased in 2025. A major driver has been concerns over deteriorating fiscal prudence in the US and other territories. Given increasing budget deficits and growing debt, investors are demanding higher yields for longer-term bonds.1 In contrast, many Asian markets are characterized by fiscal discipline, subdued inflation, deep domestic savings pools, and assured central bank actions.
The US fiscal deficit has doubled from 3.7% in 2022 to 7.3% in 2024. Conversely, the average deficit in emerging Asia was only 6.7% at the end of 2024.2 A fiscal deficit or surplus measures the difference between government income and expenditure, with a deficit indicating that the authorities are spending more than they receive.
Generally, a smaller fiscal deficit or surplus is viewed as desirable by investors. In times of economic stress, it can be beneficial for a government to step in and provide support to the economy through spending, thereby increasing its deficit. However, persistent deficits are generally viewed as detrimental to growth.3
One way to measure the level of confidence among investors is by comparing the cost of insuring against a government debt default – also known as sovereign credit risk - as observed in the changing price of credit default swaps (CDS). So far in 2025, CDS levels have fallen more for Asian markets than in developed territories, demonstrating that investors view the region’s economies more favourably than those of their developed counterparts.4
This change in the price of CDS may partly reflect bond investors’ concerns about fiscal discipline.5 An elevated yield generally indicates that market participants are demanding compensation for a higher level of perceived risk, such as the possibility of not being repaid, or because they anticipate high future inflation that will erode the real value of the bonds they hold. Research has shown that as the US fiscal deficit increases, bond investors will seek higher yields, especially if there is an acceptable range of other bond markets to invest in.6
Recent government auctions of long-dated bonds in Asia have proven popular with investors. Indonesia, Malaysia, and Thailand have all successfully issued bonds, while in July 2025, Thailand issued a 30-year bond, which had the highest bid-to-cover ratio in the last two years.7 This ratio is seen as a good indicator of how attractive the bond is to investors.
Except for the Indonesian rupiah, most other ASEAN currencies have performed strongly in 2025.8 The DXY US Dollar Index was down by around 9.0% at the end of July 20259 as doubts grew about the status of the greenback and US bonds as safe havens.10
This has also increased the attractiveness of local-currency bonds to foreign investors, as they not only receive a return on the bond but also benefit from currency strength. Indeed, foreign investor inflows into Asian local-currency bonds have been robust throughout most of the year, with net purchases of US$32 billion as of the end of June 2025.11
Although most Asian markets have seen their bond yields decline this year, they remain relatively high compared to major Western bond markets. This fact, combined with contained inflation, means that real yields, which is the yield on the bond minus the inflation rate, are still attractive.
Meanwhile, the Asian Development Bank expects inflation across Asia to be 2.3% in 2025 and 2.2% in 2026.12 In contrast, the International Monetary Fund forecasts that US inflation will reach 3.0% in 2025.13 Lower inflation means the real yield is higher than it would be otherwise; it also gives central banks more latitude to reduce interest rates.14 In turn, this will make current bonds with their higher interest rates more attractive to investors and generate downward pressure on yields.15
The relatively subdued inflationary environment across much of the region provides central banks with the ability to continue reducing interest rates if current inflationary trends persist.16 It also means that central banks could lower interest rates to help support their economies if needed.
It’s also worth noting that authorities across the region are becoming increasingly skilled at managing their fixed-income markets in times of stress.17 This engenders confidence in investors who are averse to sharp swings in currencies and bond markets.18
High levels of savings in Asia, coupled with a growing focus on regional fixed-income products, are also driving demand for local-currency bonds.19 Moreover, domestic investors, such as pension funds, insurers, and banks, tend to be long-term investors seeking bonds that help them match their future liabilities.20
Having a stable and long-term investor base is generally viewed as positive by investors because it should dampen volatility, whereas foreign investor flows can shift quickly or even reverse.
The factors which have led to the robust performance of Asian local-currency bonds during 2025 are likely to persist. While tariff uncertainty partly overshadows the economic outlook, the relatively benign inflationary environment, combined with fiscal prudence and measured central bank actions, should ensure that Asian bonds remain an attractive opportunity for investors.