Asia Fixed Income Investment Outlook – Quarterly Update

Author: Chris Lau, Senior Portfolio Manager, Invesco Fixed Income

Resilient year-to-date return of Asian Investment Grade (IG) amid geopolitical uncertainties

Asian credit has shown remarkable resilience in the first two months of 2026 delivering positive returns, even as the macro environment has become more difficult to navigate with tariff-related news, geopolitical uncertainties, AI valuation fears, and private credit worries. The JPMorgan Asia Credit Index (JACI) Investment Grade posted +1.08% return year-to-date (as of Feb 27, 2026), mainly due to the US rates rally and yield carry.

JACI IG spreads widened modestly in the first two months of 2026 by +9bps from +58bps to +67bps. We saw a divergence in credit spread performance year-to-date, while HK, Korea and Singapore still traded at close to record tight valuations, BBB-rated sovereign and quasi sovereign bonds in Indonesia, the Philippines, Thailand and Malaysia majorly underperformed. 

Asian credit spreads broadly fluctuated and sovereign spreads for Indonesia led the underperformance. A combination of risk off flows, domestic political concerns, fiscal slippage concerns and a sharp equity drawdown drove spread widening and underperformance of Indonesian US dollar bonds versus regional peers.

Regional spread widening  in the Philippines, Malaysia, Thailand and China was mainly due to the broad sentiment sell-off, increase of risk premium and demand for broad EM Asia sovereigns, causing their US dollar bonds to lag despite stable fundamentals.

What the Middle East conflict means for the Asia region

Military conflict in the Middle East broke out at the time we were preparing this outlook. We saw US-Israel strikes on Iran at the end of February and Iran retaliating with missiles and drones targeting countries across the region. Geopolitical tensions significantly intensified dampening market sentiment and triggered risk aversion. Brent went from $70/b to $84/b¹ as disruption started in the Strait of Hormuz. Current Brent reflects a short closure only. As the situation in the Middle East remains fluid, there is possibility oil price could hit $100/barrel if prolonged closure leads to a large production shutdown. How long such a spike might last will depend on how the situation unfolds.

US-Iran escalation heightens stagflation risks. Risk assets have already come under tremendous pressure, especially at a time when the macro environment has become more difficult to navigate.

An oil supply shock would hurt most Asia macro. Higher oil prices are generally negative for economic activity in the region. Thailand, Korea, India and the Philippines are the most vulnerable to higher oil prices due to their high dependence on imports. Higher oil prices could also pose further fiscal challenges to Indonesia at a time when it is being scrutinized by global investors and credit rating agencies.

What’s ultimately more important to the macro backdrop for Asia is the evolving AI or semiconductor new economy, which we expect to continue to be robust this year driven by AI capex spending. This is likely to partially offset any negative impact from higher oil prices.

We expect Asian governments to implement fiscal measures as a first line of defense to protect consumers via domestic price control, higher subsidies, tax cuts etc. Benign inflation pressures allow policy frameworks to remain accommodative and responsive and central banks have the tools to respond and support liquidity conditions or currencies. We believe that Asian macro fundamentals remain sufficiently resilient, which should help the region absorb short‑term market volatility and higher oil prices.

Risk premia have already started to build. The market has assessed the potential negative impact on countries and sectors that are vulnerable under the prolonged military conflict. We’ve seen spreads on oil and gas importing countries and higher beta credit widening. Near all-time tight valuations have left them vulnerable to more risk reduction and profit taking. However, a protracted war and oil surge are not in the US’s interest and geopolitically driven pull backs are typically short lived.

Asia credit outlook: Cautious optimism and country-specific dynamics

Our outlook for Q2 remains cautiously constructive. Apart from yield carry, the recent widening in spreads has presented some alpha opportunities for potential spread compression. We remain broadly positive, underpinned by strong technicals, a gradual improvement in fundamentals and a benign macro backdrop.  

While the broad JACI IG index level is still sitting near historical tights, valuations have started to look compelling in selective areas after the recent widening. Individual names with sound fundamentals have already widened +30bps on broad beta risk off selling. We do see potential room for spread compression in selective names. For example, AA/A-rated Asian bank capital securities have offered decent yield pick up over senior debt with minimal additional credit risk. Selective BBB sovereign / quasi sovereigns such as India have shown strong fundamental momentum and growth prospects. We also believe the HK recovery story will continue to play out. Country- and sector-specific allocations could continue to play a critical role in shaping credit performance across the region.

We expect US treasury volatility to continue in Q2 driven by policy uncertainty, the appointment of a new Fed Chair and stronger-than-expected US data, however high-quality Asian credit should hold up well due to local demand and resilient fundamentals. Net issuance remains modest and we believe disciplined issuance as well as sustained investor demand will continue to provide a strong technical backdrop.

Author: Norbert Ling, Head of Fixed Income Portfolio Management, APAC

In 2026, Asian high yield (HY) has continued to deliver robust returns year-to-date with the JACI Asia High Yield index up by 3.1% (See Table 1) as of 26 February 2026 in a relatively benign default environment. By rating category, single B and CCC outperformed, accounting for around 40% of the total return year-to-date. As seen in Table 2, the standout sector by performance was the real estate sector which accounted for around half of total excess returns in 2026, even though it represents only 10% in benchmark weight.

We still see Asian HY has value on a rates hedged basis; we prefer BB over B rating

Given the supportive fundamental backdrop, we still see value in Asia HY spreads as it can potentially provide an extra cushion of income. That said with BB spreads now in the low 200s, we believe Asia HY bonds could be more favorable on a rates hedged basis given interest rate sensitivities are higher.

By rating categories, we prefer to own BB over B rated bonds with the yield differential at only 170bps (Figure 1). This up in quality switch may help to improve portfolio resilience as we see income become a bigger driver of returns, rather than spread tightening.  We see Asia BBs as part of a toolkit to build a robust global portfolio. Within the single B space, we are more positive on bonds going in a positive credit direction towards BB in the medium term.

India HY remains a core overweight with more diversification across sectors

Certain issuers within the Indian HY universe have benefited from foreign investment into India that translates into upward ratings pressure, ranging from non-bank financial institutions, banks and renewables. These equity investments also have offered a diversified source of funding away from public equity markets. These issuers are continuing to scale up in their respective sectors, which we view as positive for their credit profile. In February, the Reserve Bank of India (RBI) also revised the External Commercial Borrowing (ECB) regime that will help to drive a greater diversity of Indian issuers to access the offshore bond markets, as well as enhancing offshore creditor protection rights. 

Impact of higher oil prices within the Asia HY universe

For Asia HY sovereigns, we will be monitoring the impact of a prolonged oil price spike on GDP as well as the ability to access refinancing. While higher oil prices will lead to current account pressures for oil importing countries and follow-on impact on inflations and fuel subsidy costs, there are self-help tools on fiscal anchors, and we expect exchange rate flexibility to mitigate the impact. In addition, multilateral institutions do have well established programs for supporting balance of payment stress and financing stress to reduce default tail risks.

For Asia HY corporates, this will vary according to the specific sector and end markets. Potential beneficiaries are issuers with exposures to metals such as aluminium where supply disruption can be supportive of prices. Upstream energy names that are long oil and gas prices will benefit as well. Oil price hikes will likely be negative for refining companies, but this could be mitigated by restocking demands and cracker spreads. In the medium term, this should help to underpin more investments in the renewable energy sector as it helps to improve energy security and economic resilience. 

Navigating geopolitical risks and sector selection remains key going into Q2

With the JACI Asia High Yield index moving wider from the tights, we see select opportunities in the sectors with sound fundamentals that have widened. We continue to like the potential of India HY, the renewable energy sector as well as subordinated financials that have strong capital buffers. We favor being up in quality and being positioned in BB over B and CCC paper. The AI narrative will continue to be key, though we see limited new issuance pressure within the Asian HY markets (outside of Japan) as that is 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.