Hanya Investment: Asian bonds combine resilience and returns, becoming an important part of investment portfolios

According to Zhitong Finance APP, Han Ya Investment stated that in the context where the role of traditional safe-haven assets is increasingly weakened by political and macroeconomic uncertainties, Asian bonds have emerged as a resilient and rewarding alternative. For investors seeking to further diversify the risks of dollar assets, the real yields of local currency bonds in Asia are attractive and have the potential for currency appreciation. Asian central banks are expected to cut interest rates in the next 12 to 18 months, which will also help support the local currency bond market. On the other hand, for investors benchmarked to the US dollar, Asian dollar bonds are expected to offer higher returns, a more stable policy environment, and lower volatility compared to developed market bonds.

Han Ya Investment mentioned that although Asian fixed income has been more attractive in returns compared to developed market bonds year-to-date (see Figure 1), it has not received the attention it deserves. While Asian investors may be more familiar with this asset class, many global investors still tend to view Asian bonds as part of the overall global or emerging market bond allocation. However, the slowdown in US economic growth, rising inflation, and deteriorating fiscal sustainability have led investors to reconsider whether to increase or maintain their allocation to dollar or US assets. In contrast, the fundamentals of Asian fixed income seem to be significantly better.

Figure 1. Cross-Asset Returns (Year-to-Date)

Source: Bloomberg. Han Ya Investment, IG: Investment Grade Bonds, HY: High Yield Bonds, EM: Emerging Market Bonds, LCY: Local Currency Bonds

The US Dollar Index (DXY) has fallen by 6.3% year-to-date. Although a rebound at technically oversold levels cannot be ruled out, the long-term trend of the dollar may be uncertain due to the expansion of the US fiscal deficit, President Trump's decision to appoint the Federal Reserve Chairman in June 2026, and any previous moves that could undermine external perceptions of the Fed's independence.

Han Ya Investment believes that given the large scale of US portfolio assets held by foreign investors, even slight changes in the foreign exchange hedging ratio could have a significant impact on the currency (see Figure 2). Nevertheless, there are many factors influencing foreign exchange hedging decisions, and considering the scale, depth, and openness of the US capital market, the dollar is likely to maintain its status as a reserve currency. Even so, investors' willingness to significantly increase their holdings of dollars and US assets may be diminishing. Investors' stance on the dollar has shifted from optimistic at the beginning of the year to neutral by the end of the first quarter, and then to bearish in the second quarter.

Figure 2. Total Holdings of US Portfolio Assets

Source: U.S. Department of the Treasury International Capital Flow Report, Haver, UBS

As the supply of U.S. bonds increases and inflation rises, U.S. fixed-income investors seek sufficient returns to compensate for duration risk. Therefore, there is still room for U.S. long-term bond yields to rise. We found that after the global financial crisis of 2008-2009, quantitative easing policies once helped suppress long-term bond yields, but this policy backdrop no longer exists.

Given the developments mentioned above, it is expected that global bond investors will further diversify portfolio risks, enhance returns, and strengthen resilience.

For investors with the U.S. dollar as their benchmark currency and seeking to diversify dollar asset risks, the technical factors of Asian dollar bonds are favorable, and the overall yield remains attractive. According to historical data, the 1-year, 5-year, and 10-year risk-adjusted excess returns (measured by the Sharpe ratio) of investment-grade bonds in the Asia-Pacific region are all higher than those of similar U.S. bonds (see Figure 3). Although the current Asian dollar credit spreads are relatively narrow compared to historical levels, the credit fundamentals are expected to remain robust due to the limited extent of corporate involvement in U.S. trade. Most issuers of dollar bonds in the Asia-Pacific region focus on the domestic market and are therefore relatively unaffected by U.S. tariffs.

Meanwhile, although the total supply of Asian credit is expected to be higher than last year, due to the external financing costs still being far lower than offshore dollar financing costs, coupled with bond issuers being able to obtain bank financing/loans, it is expected that dollar bonds will continue to record net negative supply.

Figure 3. Sharpe Ratio of Investment-Grade Corporate Bonds

Source: Bank of America Global Research, Intercontinental Exchange Data Index Company. As of the end of May 2025.

Perhaps surprisingly, the volatility of Asian investment-grade bonds is generally lower than that of global investment-grade bonds. Figure 4 shows that from June 2006 to June 2025, except during the global financial crisis and the COVID-19 pandemic, the monthly declines of Asian investment-grade bonds were lower than those of global investment-grade bonds for most of the time.

Figure 4. Monthly Declines

Source: Bloomberg. As of the end of June 2025.

Hanya Investment stated that for investors seeking to diversify dollar risks, lower inflation and higher real yields in Asia provide strong investment rationale for local currency bonds in Asia. Bloomberg estimates that by the fourth quarter of 2026, the interest rate cuts by central banks in Asian countries will range from 15 basis points in India to 60 basis points in the Philippines. Meanwhile, the economic cycles and supply-demand patterns in various Asian markets differ, providing opportunities for active bond fund managers to enhance value through duration, currency, and credit management On the other hand, the real yields in emerging markets in Asia have surpassed historical averages (Figure 5). The nominal bond yield in India is currently more than 420 basis points higher than the latest inflation rate, with real yields exceeding the 5-year average by 2.5 standard deviations and the 10-year average by 1.5 standard deviations. Similarly, the real yields in the Philippines, Thailand, South Korea, Malaysia, and Indonesia are also higher than their respective 5-year and 10-year averages.

Figure 5. Real yields are relatively high compared to historical levels (z-scores)

Source: Bloomberg. Current 10-year real yields relative to the standard deviation of the 5-year average. As of August 6, 2025.

Meanwhile, since the beginning of 2025, short-term money market rates in major Asian economies have declined, reflecting ample liquidity, which has led to strong demand for duration in Asia, helping to suppress yields and keeping the volatility of local currency bond markets lower than that of developed market bonds.

Additionally, over the past 18 to 24 months, the offshore RMB market has undergone a structural transformation, characterized by rising demand, enhanced liquidity, and an increase in high-quality issuers. As yields in the onshore Chinese bond market have declined and the yield curve has flattened, Chinese investors are seeking to enhance spreads and extend credit duration. For these investors, offshore RMB bonds naturally become the preferred choice. Benefiting from high-quality companies issuing bonds to seize low-cost financing opportunities, as well as increased demand from Chinese investors such as institutions, life insurance companies, and brokerages, the liquidity of offshore RMB bonds has also significantly improved