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Asian investment grade (IG) credit delivered resilient performance between March and mid-May 2026 despite a more challenging macro backdrop. Geopolitical-driven energy shocks pushed the Brent oil price above $100 and repriced the inflation breakeven. Credit spreads tightened in significantly in April as ceasefire optimism reversed sentiment. Spreads stayed at near historic tights and returns were supported primarily by income carry, disciplined net supply, and continued institutional demand. The JPMorgan Asia Credit Index (JACI) Investment Grade posted +0.24% return year-to-date1, with coupon income offsetting the negative effect of higher underlying rates.
Asian IG has continued to compare favorably with many global credit peers, supported by its shorter-duration profile, limited direct exposure to energy disruption, and strong sponsorship from regional institutional investors. More broadly across the region, valuations still look rich at the index level, but selective opportunities have emerged after bouts of spread widening in higher-beta sovereign and quasi-sovereign segments. From a portfolio construction perspective, the case for Asia IG rests not just on resilience, but on the ability to lock in attractive all-in yields without materially compromising quality.
Performance dispersion across countries has become more pronounced. Indonesia remains a key area of focus given fiscal sensitivity to higher fuel subsidy costs and the risk that the budget deficit could come under pressure if oil prices remain elevated. Thailand also warrants caution, particularly where concerns over the sovereign outlook continue to weigh on selected bank capital and subordinated instruments. In contrast, China investment grade remains technically well supported, while Hong Kong, Japan, Australia, and selected Indonesian quasi-sovereigns offer a more balanced combination of carry and credit stability. In this environment, country and sector allocation are likely to matter more than broad index direction, especially as tighter valuations leave less room for disappointment on policy, fiscal, or geopolitical developments.
Source: Bloomberg, data as of May 14, 2026.
Persistent geopolitical tension in the Middle East has introduced an additional layer of uncertainty into the 2026 outlook by raising the risk of sustained volatility in oil and LNG prices. For Asia, the key transmission channel is through oil and LNG import costs, which can pressure current accounts, margins, inflation expectations, and fiscal balances. The most vulnerable economies are those with higher energy import dependence or weaker fiscal flexibility, including Thailand, Korea, India, and the Philippines, while Indonesia also faces market scrutiny because higher oil prices could complicate fiscal discipline through subsidy support.
That said, Asia enters this phase from a position of relatively benign inflation, and higher energy prices do not necessarily transmit one-for-one into end-demand inflation because of subsidies, price controls, and strategic reserve buffers in several markets. Parts of the region also continue to benefit from policy flexibility, technology upgrading, industrial investment, and AI-related capital expenditure. If the conflict remains contained, market effects may prove temporary. If it broadens and energy prices remain elevated for longer, spread widening would likely be more meaningful in higher-beta sovereign and cyclical credit segments, while renewed pressure on long-end government yields could weigh further on longer-duration credit.
More broadly, geopolitical shocks tend to affect Asian credit primarily through sentiment, commodity prices, and the rates backdrop rather than through immediate balance-sheet deterioration for most high-quality issuers. For that reason, indiscriminate spread widening can create selective entry points. However, the current environment also reinforces the case for staying up in quality and focusing on issuers with resilient fundamentals, sound liquidity, and manageable duration exposure. In our view, short-lived geopolitical pullbacks are less important than the risk of prolonged energy disruption becoming embedded in inflation and growth expectations.
Our outlook for Asian investment grade in the 2H 2026 remains cautiously constructive, although slightly more defensive than at the start of the year. The asset class continues to benefit from supportive carry, healthy demand technicals, and manageable refinancing conditions, but prospective returns are now more likely to be driven by income than by meaningful further spread tightening. With spreads already close to the tight end of their historical range, the margin for error has narrowed and bottom-up security selection has become increasingly important.
From a technical perspective, we expect Asia IG will continue to benefit from negative net supply and sustained demand from insurers and other long-term investors. Across Asia ex-China, we think gross issuance is likely to rise, but a healthy redemption profile and still-disciplined primary supply should keep market conditions broadly balanced. Starting yields remain an important anchor for forward returns, and the current yield environment continues to support exposure to high-quality Asian credit. We remain particularly constructive on short-duration credit, where the margin of safety is stronger and total returns should prove more resilient if rates volatility persists.
At the macro level, the key risks for the 2H are clear: renewed US Treasury volatility, a more persistent energy shock, delayed spillover from higher input costs into growth and corporate fundamentals, and a sharper correction in AI-related investment spending. These are not our base-case assumptions, but they represent meaningful tail risks and argue for a more selective stance. In our view, investors should prioritize resilience, carry efficiency, and diversification rather than pursue the final stage of spread compression.
Geographically, we favor a balanced allocation across Japan, Australia, Hong Kong, China, and selected Indonesian/India exposure, combining income generation with credit quality and diversification. From a sector perspective, we continue to prefer high-quality financials and selected quasi-sovereigns, while remaining more cautious where spreads do not adequately compensate for sovereign, fiscal, or energy-related risks. More broadly, the fixed income opportunity set has improved structurally relative to the low-rate era: investors can once again build portfolios around attractive income without moving materially down in credit quality. Overall, Asia IG remains a resilient and investable asset class, but the case for owning it now rests more on carry, short-duration resilience, and disciplined bottom-up security selection rather than on broad market beta.
Asia high yield has delivered solid returns in 2026, with income remaining the main return driver.
The Asia high yield market is shrinking and becoming more concentrated, making selectivity more important.
We prefer higher-quality BB names over lower-rated bonds as spreads leave less room for upside.
In 2026, Asian high yield (HY) continued to deliver robust returns year-to-date after the March sell-off with the JPMorgan Asia Credit Index (JACI) Asia HY up by 2.54% as of 13 May 2026.2 Income remained a core driver of returns, accounting for around 2% of total return. The asset class experienced a very strong V-shaped recovery in the months of March and April, recovering from a 3% decline to the bottom in late March.
With spreads trending towards the tight end of the range, we see limited room for spread tightening and instead argue that returns are more likely to be driven by income.
Notably, even accounting for its vibrant primary market, the Asia HY market continues to decline in size from around $180bn in mid-2022 to $115bn as of 15 April 2026 (Figure 1). This has had an impact on the overall index and asset class constitution, resulting in an increase in the concentration of large bond issuers. The top 10 tickers within the index now account for 40% of the benchmark weight as of 30 April 2026, versus 24% on 29 April 2022. This higher concentration ratio reduces the diversification and can increase the risk of permanent capital losses when any large Asian HY issuers face credit headwinds. That said, we take comfort that the ratings composition of the Asia HY index has continued to remain stable over the last 2 years with around 70% of the index rated BB and B (Figure 2).
Within the JACI HY Index, we prefer BB rated bonds over B rated bonds, given the limited yield pick up to be invested in B rated bonds. In our Q2 outlook piece, we advocated to consider Asia HY (especially BB) on a rates hedged basis. With the sell-off in front end rates that is now pricing in rate hikes, we think that owning all-in yields in Asia HY may offer relative value, particularly in the short duration space. We see room for Asia HY issuers to undertake opportunistic tenders to refinance their upcoming maturities earlier. These leverage neutral transactions are the main reason why the index has not been growing in size again.
With the JACI Asia HY index moving back to tights of 2017 levels (in credit spreads), we think it’s important to be selective in the names and sectors we are considering. While the asset class continues to shrink in size, we believe that Asia HY may offer income diversification benefits for global fixed income portfolios with its distinctive fundamental characteristics and benign default backdrop, although risks remain.
We continue to see relative value in HY rated corporate hybrids from the investment grade (IG) rated issuers, namely gaming sector, renewable energy sector as well as subordinated financial names that have strong capital buffers. We prefer high-quality segments within Asia HY, such as BB over B and CCC paper, subject to market conditions. We think the AI narrative will continue to be key, though we see limited new issuance pressure within the Asian HY markets (outside of Japan) as those are likely to be financed via equity or bank financing channels at this point.
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.
Forward-looking statements are based on current expectations and assumptions, and yet actual results may differ materially from those expressed or implied.
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