The outlook for Asian fixed income: winners and losers emerge

• A strong US dollar is a challenge for Asian fixed income, but we do not foresee a rerun of the disruptions seen in 2022.
• Markets may be overestimating the risk of rate hikes by Asian central banks, creating opportunities for active managers.
• The US-Iran conflict has not hit Asian credit as hard as expected – some issuers are benefiting.

There are two strands to Asia’s growth story in 2026: AI and semiconductors continue to boost tech-linked economies, with demand for electronics and data centres extending this boom across the region. At the same time, economies relying heavily on uneven domestic demand face challenges and may need greater policy support.

That diverging story has remained in place since the start of the year. What has changed is the monetary policy debate, which has evolved from hopes that interest rates will be cut to the expectation of hikes. The key question is how much of the tightening currently priced into markets will be delivered.

In credit, the overhang from the US-Iran crisis will likely continue to dominate the macroeconomic growth outlook. This could introduce volatility into credit markets; however, our outlook for Asian credit fundamentals is stable, underpinned by strong fundamentals.

Here, we reveal our key themes for Asian fixed income investors in the second half of 2026.

A strong US dollar tends to raise borrowing costs for Asian issuers while driving capital outflows. With US interest rates expected to rise and US growth showing resilience, we predict that a strong dollar will be a headwind for Asia for at least the next six months.

However, we do not expect Asian fixed income to endure the kind of broad and disorderly adjustment that was seen following the last period of rapid US rate hikes in 2022. Our house view foresees a moderate two-hike cycle from the US Federal Reserve this year, a shallower policy cycle than in 2022. Meanwhile, Asian currency valuations provide a buffer. Most Asian currencies are trading below their 10-year real effective exchange rate medians and are less expensive than the levels seen going into 2022 (Exhibit 1).

A firmer US dollar can limit policy independence in economies with weaker external financing positions, such as Indonesia. This could create winners and losers across Asian bond markets – but we do not expect a uniform sell-off. The dollar remains a headwind, but not one that invalidates the structural case for Asian local bonds.

The AI cycle has broadened more than expected. Korea and Taiwan remain the central nodes of the hardware supply chain, but the benefits now extend into Singapore, Malaysia and Thailand, through other electronic equipment exports and data centre investments.

The strength in exports has also been accompanied by stronger investment. Semiconductor producers in Korea and Taiwan are raising capital expenditure, while Korea, Thailand, India and Malaysia have emerged as major recipients of data centre investments.

Yet the benefits have not spread evenly into the domestic economy. Strong export receipts have yet to generate a broad improvement in labour demand or household income, and consumer confidence remains weak across the region.

India and Indonesia continue to post respectable domestic growth, while Thailand has seen a pick-up in investment. But the broader regional pattern is that factories and data centres are enjoying more growth than households.

Some tightening from Asian central banks is coming. But how much? Growth has surprised positively in economies with greater exposure to the AI cycle, particularly Korea, Taiwan and Malaysia. These are markets where at least part of the current hike pricing has a fundamental basis.

But we do not think Asia is entering a broad 2022-style tightening cycle. Headline inflation has risen, but core inflation remains more contained than during that episode.

The distinction matters for bond markets. Where growth is strong and inflation is broadening, some hikes are likely to materialise. Where inflation is mainly supply-driven and domestic demand remains weak, the full tightening path priced by markets may prove difficult to deliver (Exhibit 2). The opportunity is no longer in finding the next central bank to cut. It is in identifying where rate-hike fears have moved ahead of the likely policy response.

When it comes to credit, the key thing to note is how resilient the asset class has proved during a challenging year of geopolitical uncertainty and supply chain disruption. Asian credit fundamentals have shown strength through this volatile period, reflected by an improving upgrade/downgrade ratio and low default rates. 

Some issuers in Asia have benefited from the disruptions, including upstream oil, gas and natural resources producers, as well as refiners and aluminium producers that are substituting dislocated Middle Eastern supply. Meanwhile, a boost in consumption arising from AI-related investments provides a supportive backdrop for producers of copper and aluminium.

We do expect softness in some sectors: retail and automotive, where consumer purchasing power may be impacted by higher energy costs and uncertainties around trade policy; airlines and airport infrastructure, which are industries that must contend with sharply higher jet fuel costs; and the agro-chemical sector, where growing seasons may be impacted by shortages in fertiliser.

We think this mixed outlook calls for an active approach to issuer selection. However, we believe strong fundamentals put Asian credit in a good position to perform well in the rest of this year and beyond. It is notable that two-thirds of the JP Morgan Asia Credit Index (67%) is composed of sovereigns or state-owned enterprises, which tends to limit systemic risk (Exhibit 3).

We think the current global backdrop calls for selectivity and an active approach to duration risk. Chinese government bonds are our favoured defensive anchor because they are supported by a deep local investor base and an accommodative policy bias. We think China should be relatively resilient if the US dollar and US yields remain firm.

We also favour Korean government debt, in which markets are pricing a rapid hiking cycle. The AI boom justifies some policy normalisation, but it is unclear if this growth will spill over into employment and household demand. We are monitoring the situation for opportunities to add duration when hike pricing becomes excessive.

India remains our preferred higher-yielding market. Recent measures to strengthen external funding, an improvement in foreign demand for government bonds, and attractive yields provide a better buffer against a firm US dollar than in other deficit economies.

In investment-grade credit, we continue to favour capital instruments across financials and corporates and see good opportunities in insurers. We also like stable carry positions across Hong Kong real estate, Australian resources and Indonesian independent power producers. In high-yield and cross-over, we are focusing on the upstream energy sector in Australia and Indonesia, recovering stories in China, and selected names in defensive sectors such as ports, telecom, renewables and distribution utilities.