Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Asia is home to some of the fastest-growing economies in the world. The region contributes roughly 60% of the global gross domestic product (GDP). However, Asia is still underrepresented in global bond indices. But the tables are turning, and the recent inclusion of Asia bonds in global bond indexes sparks optimism about the asset class.
JPMorgan’s Government Bond Index-Emerging Markets included Indian government securities in June 2024, Bloomberg Index Services’ Emerging Market Local Currency Index will add the asset class in January 2025, and FTSE Russell will include Indian bonds in the Emerging Markets Government Bond Index starting in September 2025.
Additionally, FTSE Russell will include South Korean government bonds in its World Government Bond Index in November 2025.
Market development
Fixed-income markets in Asia were underdeveloped leading up to the 1997-98 Asian financial crisis. Many corporations relied heavily on short-term bank borrowing, which left them vulnerable when they couldn’t roll over their debt. This crisis highlighted the need for more resilient capital markets, and since then, significant reforms have been implemented to foster larger, more open, and liquid fixed-income markets.
The Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund (ABF) were instrumental in this transformation. ABMI focused on expanding the issuer base across the region, while ABF improved liquidity in major government bond markets and facilitated foreign investment by reducing barriers. Over the last two decades, these initiatives, combined with other structural reforms, have helped Asia-Pacific economies transition to interest rate-based monetary policy frameworks. This transition has enabled central banks to more effectively channel policy adjustments to the real economy, enhancing economic resilience.
Moreover, the opening of Asian bond markets has led to substantial foreign capital inflows, particularly into long-term local currency bonds. This trend has provided Asian governments with a more diversified funding base, reducing reliance on foreign-denominated debt and mitigating currency risk exposure.
Market size and composition
Thanks in part to policy initiatives like ABMI, the size of Asia’s fixed-income markets has grown substantially. As of mid-2024, the local currency bond market in emerging East Asia reached approximately $25.1 tn, up from around $23.5 tn in early 2022, as per the Asian Development Bank (ADB) September 2024 report.
The region’s corporate bond market rose to 1.5% q-o-q in Q2 2024 due to increased issuance in six of the region’s nine markets. China led this growth as banks ramped up debt sales to meet regulatory capital requirements, as per the ADB.
Overall, China continues to dominate the Asian bond market and growth accelerated in Q2 2024. Total local currency (LCY) bonds outstanding grew 2.2% quarter-on-quarter (q-o-q) to reach CNY145.1 tn (approx. $20 tn).
In South Korea, LCY bonds outstanding grew faster in the second quarter of 2024, reaching KRW3,398.3 tn at the end of June (approx. $2.44 tn). Aggregate local currency (LCY) bonds outstanding in ASEAN markets reached $2.2 tn at the end of June.
“With growing recognition from global index providers and international investors, Asian local currency government bonds are well-positioned to attract structural inflows from global investors, who remain under-allocated to this asset class,” opines Schroders.
The Asian international bond market has experienced significant growth over recent years as well. Issuers turn to international markets to secure foreign currency funding, optimise costs, diversify funding sources, and gain global visibility, typically after they become seasoned in their domestic capital markets.
While local currency bonds are primarily issued in domestic markets and cater to a broader spectrum of investors, international bonds are mostly sold only to institutional and individual professional investors. For investors, international bonds offer exposure to emerging market credits without navigating domestic market access or local currency risks, enhancing portfolio diversification and yield potential.
According to the International Capital Market Association (ICMA), the issuance volume of international bonds from Asian issuers grew at an annual rate of about 11% on average between 2006 and 2021. This is higher than that of the Americas, EMEA and Oceania.
Annual issuance volume peaked at about $626 bn in 2021 before dropping to $371 bn in 2022 and recovering to approximately $380 bn in 2023.
“Although the issuance volume declined considerably in 2022 and 2023, the average issuance volume of the recent two years was still higher than the average of $334 bn between 2006 and 2023,” the “Asian International Bond Markets: Development and Trends” report published in March 2024 said.
According to the ICMA, Asian issuers showed an increased preference for issuing bonds in local currencies for cost-effectiveness during 2022 and 2023.
Japan, South Korea and Hong Kong mainly drove the recovery of the Asian international bond market in 2023. China remains an important player in the market, although the issuance declined by approximately 12% year-on-year to $108 bn in 2023 from $122 bn in 2022 and $230 bn in 2021. With about 29% of the total issuance volume, China ranks second only to Japan.
Worth noting is also the growth of the corporate bond markets in Asia. According to a report by the OECD, issuance has grown from representing 44% of the global issuance in 2000, to 85% in 2022. The “Corporate Bond Markets in Asia: Challenges and Opportunities for Growth Companies” report underlines that the Asian corporate bond markets offer increasing financing opportunities for growth companies, and issuance has increased almost sixfold from 2000 ($5.7 bn) to 2022 ($33.3 bn).
Asia Bonds: Investment Grad vs HY
Asia’s bond market comprises both investment-grade (IG) and non-investment-grade (high-yield) securities, offering diverse opportunities for investors.
Investment-grade bonds, typically rated BBB- or higher by credit rating agencies, are believed to have a lower risk of default. In contrast, non-investment-grade bonds, also called high-yield (HY) bonds, rated below BBB-, are issued by entities with higher credit risk, offering higher yields to compensate for increased default risk. As of August 2024, the JP Morgan Asia Credit Index (JACI) indicated that over 85% of Asian bonds were investment-grade. The index includes corporate, sovereign, and quasi sovereign entities from the region. Most sovereign bonds have an IG rating and are expected to retain that credit rating over the medium term.
“Historical data shows that while HY offers significantly higher yields, it also comes with more than double the volatility and worst drawdowns compared to IG while investors often are not sufficiently compensated for such additional risks,” said David Lai, Co-CIO at Hong Kong-based ETFs issuer Premia Partners.
“In fact, during previous credit cycles, Asian USD IG bonds exhibited much better resilience and superior return, including during the recent Black Monday in August 2024 when the unwind of the Yen carry trades kicked in,” he added.
However, the high-yield segment remains significant, particularly in sectors like real estate and infrastructure, attracting investors seeking higher returns. As AllianceBernstein (AB) pointed out in an insight published earlier this year, the Asia high-yield market has changed structurally, “offering investors a much-improved risk-reward profile”. While China accounted for as much as 38% of the non-investment-grade corporate component of the JP Morgan Asia Credit High Yield Index (JACI HY) in 2021, it fell to 25% by March 2024. The trigger was the real estate crisis that drastically reduced the sector’s attractiveness. Subsequently, the share of the real estate sector in the JACI HY fell from 23% to slightly more than 7%.
“Today, the market has a more even balance of countries and sectors,” said Diwakar Vijayvergia, Portfolio Manager – Asia Fixed Income at AB. “China still dominates, but much less than it used to, and other countries—notably India, Pakistan, Thailand and the special administrative regions of Hong Kong and Macau—now account for more of the index.”
Financials are now the biggest index component, and sovereigns, consumer, and utilities have increased their shares, he added.
Inflation, monetary tightening, USD and Asia bonds
Looking back, the ultra-low interest rate environment from 2008 to the start of the Covid-19 pandemic had fuelled the growth of the international bond markets by Asian issuers. According to ICMA, the total issuance size increased from below $70 bn in 2008 to over $610 bn in 2021.
However, in 2022, the Fed and other central banks started to raise rates and taper quantitative easing to combat high inflation rates following the pandemic. That drove Asian international bond issuers to rely more on the domestic bond markets, where issuance is mainly denominated in local currency terms, which removes exposure to currency risk.
“Asian local currency bonds have delivered strong performance over the past five years compared to other major bond markets, demonstrating remarkable resilience,” highlighted Chris Wong, Investment Director, Asia Fixed Income at Schroders in an October insight.
The Markit iBoxx Asia Local Bond Index achieved a cumulative return of 14.8% in USD terms, outperforming the Bloomberg Global, US, and Pan European Aggregate Indices, which returned -4.1%, 1.7%, and -8.5%, respectively, in USD terms, he added.
This year so far, Asian credit has shown strong momentum. While Asia IG demonstrated its ongoing resilience, Asia HY particularly stood out by outperforming other fixed-income markets, including US IG and US HY, rising 11.83% until the end of July 2024. Asia IG gained 3.84% in the same period.
“HY is particularly attractive as valuations remain compelling with a high potential for solid returns over the next 6-12 months due to favourable market technical dynamics and further expected declines to default rates. IG is also well positioned to offer investors stable income and remain resilient due to the region’s economic strength,” opined Manulife Investment Management in their Asian Credit outlook published in August 2024.
The outlook for Asia bonds
As pointed out, Asia bonds are a compelling and diverse asset class, and reforms over the last decade have made fixed-income investments in the region increasingly attractive.
“The region’s different economic and rating profiles, unsynchronised rate cycles, and fluctuating local currencies offer dynamic exploitable bond opportunities,” Eastspring wrote in a market review.
The ADB sees a global moderation in inflation and forthcoming rate cuts by central banks as factors that can further strengthen financial conditions in Asia.
“Downside risks include geopolitical concerns, a weaker-than-expected economic performance in China, trade tensions between the US and China, as well as recent domestic uncertainty in some ASEAN markets,” the ADB said.
With room for rate cuts in Asia, as inflation returns to target, this should benefit local currency bonds, opines Schroder. “The weakening US dollar and expectations of further Fed rate cuts have supported Asia currencies, allowing central banks to focus more on domestic drivers such as growth, inflation, and financial stability when formulating their monetary policies,“ Wong said.
Eastspring Investments’ Portfolio Manager, Rong Ren Goh, sees the macro backdrop of moderate growth and muted inflation in Asia as positive for Asian bonds. “With rate cuts largely priced out in Asia, Asian bonds can potentially enjoy a larger boost when central banks eventually lower rates,” he wrote in a market assessment.
„While the market analyses the future rate trajectory in the US and the strength of China’s stimulus efforts, it is clear that the largely underweight positioning in China or Asia by global investors will need to be reassessed,” wrote Christina Bastin, a portfolio manager at Man Group, in an opinion piece for Nikkei Asia.
“We think now is a good opportunity for this as we expect a US soft landing scenario, something that would be positive for global credit markets and should be positive for Asia, too,” Bastin added.
For investors willing to explore the asset class, there is no lack of asset managers with deep expertise in managing Asia bond funds. Blackrock has a $2.2 bn Asian Tiger Bond fund, the DWS Invest Asian Bonds fund has $1.2 bn in assets under management. Other fund managers include Allianz Global Investors, Eastspring Investments, Fidelity International, Neuberger Berman, and Matthews Asia.
