The factors supporting a positive Asian bond outlook
We highlight the themes supporting Asian bond markets, including solid growth, evolving trade patterns, currency resilience and credible frameworks.
Despite the challenges posed by trade tensions, geopolitical uncertainty, and diverging monetary policies, Asian economies generally experienced solid economic growth in 2025. Supportive themes, including moderating inflation and declining interest rates, should continue to provide a positive backdrop for Asian local-currency bonds as we move into 2026.1
Local-currency bond prices in most Asian markets also increased during 2025.2 Issuance was robust throughout the year, especially in China and Singapore,3 as investors sought to diversify away from the US dollar.
Trade tensions trigger US dollar volatility
In April 2025, the announcement of President Trump’s Liberation Day tariffs proved unsettling for equity and bond markets. Indeed, the levies on some territories were so elevated that trade could have ceased. In the months since, several governments have negotiated deals with the US and accepted tariffs at much lower levels than initially proposed.4
The Liberation Day announcement also saw investors begin to question a long-held view that the US dollar was a safe haven, given its newfound association with uncertainty. As a result, the greenback weakened, and some Asian currencies sharply appreciated.5 Softer demand for US assets, including the dollar, has been termed de-dollarization, with other currencies, like China’s renminbi, steadily increasing their share of the global money market.6
Solid economic growth in Asia despite disruption
Even with disruptions to trade dynamics caused by US tariffs, Asian markets still posted strong economic growth. The Asian Development Bank (ADB) recently upgraded its growth projection for developing Asia in 2025 to 5.1%.7 However, it expects the rate will decline to 4.6% in 2026 as the effects of tariffs and slower global economic activity feed through to the region. Meanwhile, the International Monetary Fund (IMF) predicts that real gross domestic product (GDP) growth in 2026 will be 2.1% in the US, 1.1% in the euro area, and 3.1% globally.8
China successfully pivots away from the US
Notwithstanding the recent tensions, China’s exports remained robust in 2025 as it redirected trade away from the US towards the European Union and other markets. Year-on-year to the end of November 2025, China’s exports to the US fell by 29%, while exports to the European Union increased by 14.8%.9
Most Asian currencies demonstrate resilience
The US Dollar Index (DXY), which measures the greenback against a group of other currencies, fell by over 9% in 2025, its worst performance since 2017.10 This relative weakness was driven by a range of factors, including the US fiscal trajectory and the potential economic consequences of trade tariffs. In turn, most ASEAN currencies rose moderately against the US dollar during 2025.11
The decision by the US Federal Reserve to reduce interest rates throughout the year also gave Asian central banks the space to reduce borrowing costs to stimulate domestic demand without triggering excessive inflation.12 Furthermore, the financial authorities in several Asian markets implemented targeted measures to assist their domestic economies.13
A credible financial regulatory and legal framework
Several Asian bond markets, such as Singapore's, are now more highly rated than their counterparts in the US, UK, and Japan. While credit ratings are not the only factor investors consider in their decision-making, they do boost these markets' relative attractiveness.14 This shift in ratings partly reflects a lack of fiscal discipline in some Western economies, which has led to worsening debt-to-GDP ratios as they grapple with slow growth and worries about rising expenditure.15 The other driver is the fiscal prudence and responsible monetary policy decisions demonstrated by Asian central banks.16
Such developments represent a divergence from the long-term trend in which Asian markets effectively reinvested their trade surpluses into US assets, particularly Treasuries17. This supports the concept of de-dollarization, where trade deals move away from using US dollars and instead conduct trade and transactions in other currencies.18
The positive factors supporting Asian local-currency bonds will likely continue
As 2026 unfolds, we expect the downward trajectory of interest rates in Asia to continue, providing support for the region’s bonds. Relatively stable local currencies also increase the attractiveness of domestic bonds relative to hard currency or G3 issuance. That said, we are also mindful of potential uncertainties, such as tariff-related trade disruption, geopolitical challenges, and slowing domestic growth in China.19
Overall, the addition of local-currency bonds to a portfolio adds a further level of diversification for investors (at both the currency and underlying credit level) seeking income combined with relative stability, compared to equity and high-yield bond markets.