2025 Q4 Investment Outlook – Asia Fixed Income: High Yield
Year-to-date, Asia High Yield (HY) has delivered a strong performance, outpacing both Pan-European and US HY markets. Income remains a key driver, contributing around half of total returns alongside spread tightening.
Within Asia HY, notable outperformers included Asian frontier sovereigns and BB-rated financials, supported by minimal direct tariff impact.1 As a short-duration asset class, with averaging duration of around 2.6 years, Asia HY has demonstrated resilience amid a year marked by interest rate volatility.
Source: Invesco, Bloomberg, data as of September 5, 2025. Used with the permission of Bloomberg Finance L.P.
As we head into Q4 2025, we highlight the following themes that we believe will be of interest to investors in the Asia HY asset class.
Default rate expected to remain low for Asia HY (excluding real estate)
As highlighted in our 2025 Midyear Investment Outlook, default rates for Asia HY (excluding real estate) have remained low. At JACI HY index level, default rates amounted to 4.3% year-to-date (as of end-August 2025), compared to 4.9% in 2024. Notably, there have been zero defaults outside of the real estate sector this year. From a default-rate perspective, Asia HY (ex real estate) has significantly outperformed other global HY markets, as shown in the chart below.
This underscores the potential advantages of Asia HY and the role active management plays in mitigating concentrated risks at the issuer and sector levels. While we remain positive on the outlook for Asia HY, we maintain a cautious stance on real estate bonds and believe selectivity is key.
We observe a trend where defaulted real estate companies have undergone multiple rounds of restructuring in an effort to achieve sustainable capital structures. In contrast, many Asia HY issuers outside real estate continue to take proactive measures, such as early refinancing of upcoming debt maturities or securing bank facilities, to strengthen their liquidity profiles. As such, we remain constructive that default rates outside of the real estate sector will stay low for the remainder of 2025.
Remain vigilant about diverging fundamentals within the Asia High Yield universe
Within Indian HY, we currently favor the infrastructure sector over the renewables. Chart 3 below illustrates the evolution of various infrastructure subsectors, all of which have improved their credit metrics since 2020, with the notable exception of the renewable sector.
In our previous outlooks, we highlighted our preference for the Indian HY renewable sector and that call worked out well. However, we now observe ambitious capex growth plans in renewables that outpace earnings growth, which could weigh on credit metrics in the short to medium term.
Key credit mitigants include continued execution success and the presence of long-term power purchase agreements (PPAs) for the sector. We favor airports and ports, which have demonstrated continued deleveraging trends that translate into upward rating pressure.
HY real estate bonds offer limited yield advantage over non-real estate HY
We believe active security selection and sector allocation remain critical within the Asia HY. While income opportunities are abundant, a disciplined approach that aligns fundamentals with valuations is essential.
For example, among surviving real estate HY bonds, the yield pick-up has narrowed significantly - from over 6% at the start of the year to just below 2%. This compression reflects survivorship bias, as defaulted names have exited the BB and B rating buckets, combined with spread tightening among surviving issuers actively deleveraging and improving cash flows.
As such, we see better opportunities in non-real estate sectors, where investors could possibly avoid sector idiosyncratic financing risks associated with surviving real estate borrowers.
In this context, we believe an Asia bond strategy with the flexibility to allocate across sectors and issuers - guided by fundamentals and valuations – would be well positioned to capture credit risk premiums in Asia’s credit markets, deliver resilient income, and mitigate the risk of negative credit surprises.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.
Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.
