Macro update and Asia EM credit outlook

Overview

• EM central banks ended Q3 in monetary easing mode, driven by domestic growth concerns, subdued inflation and a favorable global macro environment. 
• The Fed lowered the federal funds rate by 25 basis points in September and signaled its intention to support growth with more cuts through year-end.
• The US dollar has weakened significantly this year and is down 10%, despite a modest recovery in the third quarter.¹
• We are cautiously optimistic on Asian credit markets as we enter the fourth quarter, based on resilient regional fundamentals and positive technical factors.

Central bank moves

Emerging market (EM) central banks maintained their monetary easing stance in the third quarter, driven by domestic growth concerns, subdued inflation and a supportive global backdrop. In September, Peru implemented a widely expected 25 basis point rate cut, lowering its policy rate to 4.25%—a level now considered close to neutral. Though inflation remains muted, we believe the central bank will stay on hold for the foreseeable future. Poland also delivered a 25 basis point cut to 4.75%, in line with expectations. However, unlike Peru, Poland may pursue further easing or front load its rate-cutting cycle, despite lingering inflationary pressures.

Turkish and Indonesian central bank moves were unexpected. Turkey’s central bank surprised markets with a 250 basis point cut to 40.5%, while removing references to its real currency appreciation policy. Although the policy may be used occasionally, the central bank appears confident that a slowing economy will help guide inflation toward its year-end target. Indonesia’s central bank also surprised markets, delivering a 25 basis point rate reduction, signaling a shift toward a more pro-growth stance and citing support from a broadly weaker US dollar. This move was unexpected, especially for a central bank focused on currency stability.

In the US, the Federal Reserve (Fed) resumed monetary easing in September in response to slowing job growth and persistent inflation. The Fed lowered the federal funds rate by 25 basis points to a range of 4.00–4.25% and signaled its intention to support growth with additional cuts through year-end. While tariffs have contributed to elevated inflation readings, the Fed views these effects as temporary. However, risks to the labor market have increased, prompting the Federal Open Market Committee (FOMC) to take a more cautious and growth-oriented approach.

US dollar trajectory

Despite a modest gain in the third quarter, the US dollar has weakened significantly year-to-date, falling by about 10%.1 Rising US fiscal deficits, policy uncertainty and a shift in global capital flows away from US assets have challenged the concept of ”US exceptionalism”. The softer dollar has provided a significant tailwind for EM by easing external financing conditions, supporting local currencies and allowing EM central banks to cut rates without triggering capital flight or inflationary pressures. Investment flows into EM have also grown, as investors have sought alternatives to US exposure. The rebound in flows has coincided with the dollar’s trajectory and what we view as attractive EM valuations.

Growth

We believe EM’s overall growth outlook is favorable and will continue to be well into 2026, particularly relative to the US, and with Asia a key driver. As US growth moderates—shifting from above-potential to below-potential levels in 2025 and likely stabilizing around potential in 2026—other developed markets (DM), notably Europe, are turning to fiscal stimulus to support their economies. Although the growth differential between EMs and DMs will likely remain narrow in the coming months, we believe non-US assets will still remain attractive, particularly EMs, because of the projected slowdown in US economic growth and the high carry offered by EM assets.

Asian credit outlook

Asian corporate credit

We are cautiously optimistic about Asian corporate credit markets as we enter the fourth quarter, based on resilient regional fundamentals and constructive technical factors. However, investment grade valuations have become less compelling, in our view, following strong rallies earlier this year. External risks, particularly those related to US monetary policy, trade tensions and regional geopolitical developments continue to weigh on investor sentiment. In the Asian high yield space, we expect default rates (excluding real estate) to remain low. Many high yield issuers outside the real estate sector are proactively managing their liquidity by refinancing upcoming maturities early or securing bank facilities. 

US dollar-denominated new issuance has been well digested by the market, but we’ve observed a trend of more issuance in non-US dollar currencies like the euro and different Asian local currencies. Although political risks have increased across Asian countries, regional issuers’ credit fundamentals remain broadly stable. Despite strong technicals and solid fundamentals, we believe tight valuations warrant close monitoring.

Asian EM hard currency sovereign and quasi-sovereign bonds

Asian EM hard currency sovereign and quasi-sovereign bonds ground tighter in September. Asia is currently the only region with spreads below 100 basis points within the JPM EMBI Global Diversified Index.² Barring any significant negative developments related to tariffs, we expect Asian credit spreads to continue to narrow, driven by strong technicals and easing trade tensions. In this environment, in which spreads remain tight, other regions will likely outperform Asia. Conversely, during risk-off periods, we would expect Asia to outperform due to strong domestic support for hard currency bonds and robust economic fundamentals. Asia sovereign high yield fundamentals appear stable, but we believe active security selection and thoughtful sector allocation are critical. While income opportunities are abundant, we believe a disciplined approach that aligns fundamentals with valuations is essential. 

Asian EM local currency bonds

Asian EM local currency bond performance was subdued in September, as currencies and rates remained largely flat. Given weaker economic outlooks in the region, we see the potential for interest rate cuts across Asian economies, which could present opportunities for capital appreciation. Local currency also offers attractive carry in local currency terms, in our view. However, we remain cautious on Asian currencies due to their strong performance so far this year and signs of slowing external trade. 

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. 

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. 

Non-investment grade bonds, also called high yield bonds or junk bonds, pay higher yields but also carry more risk and a lower credit rating than an investment grade bond. 

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. 

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.