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The Asian credit market remained resilient throughout the third quarter, underpinned by stable macroeconomic fundamentals, supportive technicals, and limited new issuance, despite persistent trade and geopolitical uncertainties. Credit spreads continued to tighten, driven by strong technicals and easing trade tensions. Overall, improved US-China trade relations helped bolster investor confidence, although unresolved trade negotiations and regional geopolitical uncertainties posed challenges.
Asian credits markets delivered strong year-to-date performance, with investment grade (IG) credits returning 6.13% and high-yield (HY) credits gaining 7.76% as of September 8, 2025. Credit spreads remained generally range-bound near historic tights, moving in response to global rates and regional geopolitical developments. Tight spreads have diminished the valuation appeal. Nonetheless, underlying market fundamentals and technicals remain broadly supportive.
Trade-related uncertainty has moderated since our previous outlook. While specific implications for individual Asian countries and sectors remain to be clarified, market participants are increasingly focused on assessing the real economic impact of tariffs beyond headline rates. Although peak tariff uncertainty appears to be behind us, the next phase will likely emerge as the economic consequences begin to materialize. Countries facing disproportionate negative effects from tariffs remain most vulnerable. Despite the easing immediate tariff-related concerns, we anticipate continued uncertainty, particularly in light of a recent US appellate court ruling that deemed most reciprocal tariffs unlawful.
The recent deterioration in the US labor market prompted the Federal Reserve (Fed) to implement an interest rate cut in September. A soft jobs report in early September, coupled with significant downward revisions to August data, signaled heightened downside risks to the US labor market. This trend reflects a deceleration in hiring activity, as evidenced by the July employment report, and a shift in the Fed’s policy focus toward mitigating labor market risks while monitoring inflation, which remained elevated at 2.7% in June, above the Fed’s 2% target. Following the anticipated September cut, two additional 25-basis-point cuts are projected by year-end. This trajectory reflects a data-dependent approach, with labor market deterioration and moderating inflation as key drivers, although tariff-induced inflationary pressures could influence the pace of easing. Overall, these cuts are expected to improve global financial conditions, supporting Asian credit markets by reducing borrowing costs and enhancing Asian currency stability.
The Trump administration’s efforts to exert greater influence over the Fed have raised concerns about the central bank’s independence. Markets appear to be in the early stages of pricing in the implications of increased politicization of monetary policy. Should concerns over the Fed’s independence gain traction, potential risks including higher inflation premia, a pronounced steepening of the US yield curve, and a weaker dollar could be anticipated.
Asian credit markets enter Q4 2025 with a cautiously optimistic outlook, supported by resilient regional fundamentals and constructive technicals. However, IG valuations have become less compelling following strong rallies earlier in the year. External risks—particularly those stemmed from US monetary policy, trade tensions, and regional geopolitical developments—continue to weigh on sentiment.
Against this backdrop, country-specific dynamics will play a critical role in shaping credit performance across the region. The outlooks for key markets are outlined below:
China remains a key driver of regional market dynamics. Continued policy support and monetary easing are expected to stabilize credit conditions, although persistent weakness in the property sector and export vulnerability to US tariffs pose downside risks IG issuers with strong government backing remain well-supported, attracting demand from banks and cross-border investors.
India benefits from robust domestic demand and an accommodative policy stance, with further rate cuts anticipated. Credit spreads are anticipated by solid fundamentals, though the imposition of 50% tariffs by the US poses a drag on growth. Potential US sanctions related to Russian oil imports could further dampen investor sentiment. IG issuers in infrastructure and financials continue to offer attractive opportunities.
Korea provides relative stability, with limited exposure to trade disruptions and strong corporate balance sheets. IG credits have been generally well-positioned, supported by both monetary and fiscal stimulus as the Bank of Korea prioritizes growth recovery.
ASEAN markets exhibited mixed resilience. Indonesia faces political unrest and fiscal challenges, while Thailand contends with ongoing political instability. However, regional diversification and selective IG exposure—particularly in Singapore and Malaysia—could offer defensive positioning.
Technical conditions remain supportive across Asia. Net supply in the IG segment is negative, driven by maturities and coupon payments. The ongoing shift by issuers toward local currency funding—seeking lower financing costs—continues to dampen Asian US dollar bond supply. This supply-demand imbalance has helped sustain spread levels, although further compression is likely limited.
Central banks across Asia retain flexibility for further monetary easing, with two to three rate cuts expected in 2025. Declining inflation and subdued global growth support accommodative stances. However, foreign exchange sensitivity and reserve adequacy may constrain divergence from US monetary policy.
As Asian credit markets continue to navigate a global landscape marked by potential disruptions, several macroeconomic and geopolitical risks warrant close monitoring, given their potential to materially influence portfolio performance in the coming quarter.
Key risks include:
Given rich valuations, a defensive approach is warranted. Recommended strategies include:
While Asia credit remains resilient and has offered attractive yields and diversification benefits, navigating Q4 requires disciplined risk management and country-specific positioning to mitigate external shocks and capitalize on selective opportunities.
Source: Bloomberg, data as of September 11, 2025. Used with the permission of Bloomberg Finance L.P.
In conclusion, we anticipate US interest rate volatility to remain elevated in 2H 2025, reflecting ongoing uncertainty around the debt burden, US treasury supply and declining demand. The tariff discussion and US rates will continue to exert a dominant influence on the asset class. However, Asia IG credit is expected to remain resilient, supported by accommodative regional central bank stances and solid fundamentals across major Asian economies. We expect credit spreads to stay volatile as well with the continuous headlines. Whilst yield carry continues to be attractive, managing tail risk is important, and it is important to stay up in credit quality. We expect opportunities will emerge in the coming months but maintain our relative defensive stance.
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.
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.
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.
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.
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