Hard currency sovereign and quasi-sovereign bonds: Limited upside, selective risks
For hard currency Asia emerging market sovereign and quasi-sovereign bonds, fundamentals remain strong among countries with lower fiscal impulse. The asset class has done well in 2025 year-to-date, so we do not expect significant further upside compared to other emerging market hard currency sovereign bonds.
However, Asian countries have demonstrated greater resiliency during market selloff triggered by external shocks. As long as domestic fundamentals stay robust, we do not anticipate significant widening of sovereign and quasi-sovereign bond spreads widen in these Asian markets. Conversely, countries pursuing aggressive fiscal expansion plans may face reduced investor exposure, given the current tight spread levels.
Opportunities and risks of local currency bond markets
For Asia’s local currency bond markets, we hold a similar view that we favor countries with prudent fiscal policies. As monetary policies are likely to ease, we see strong potential for lower government bond yields across Asia.
However, a negative supply shock from aggressive fiscal expansion could unsettle market participants, prompting a shift toward other emerging markets offering more attractive carry and capital gain potentials.
Another key factor influencing local currency bond performance is foreign exchange dynamics. The USD has weakened since March 2025, driven by tariffs and concerns over slower US growth. There is a real possibility that the Fed delivers more rate cuts than currently expected, which would further pressure the dollar.
Among the high-yielding Asia local currency government bonds, India stands out with government continuing to support economic growth without excessive public spending. Combined with potential rate cuts, low inflation and possibly lower tariff rates, this is likely to create compelling investment opportunities.
Our country-specific views will evolve as fiscal policies shift in reaction to economic realities. For now, current market conditions prevent us from making a generalized outlook for Asia’s emerging markets.
Positioning for opportunities amid uncertainty
Asia’s emerging markets enter 2026 with a mix of opportunities and challenges. While geopolitical risks and fading external demand weigh on growth prospects, low inflation and accommodative monetary policies provide a supportive backdrop for local currency bonds. Hard currency sovereign and quasi-sovereign bonds remain fundamentally sound, though upside appears limited given tight spreads. Divergent fiscal strategies across countries will be a key differentiator, requiring selective positioning and active monitoring. In this environment, investors should focus on countries with prudent fiscal management and structural resilience, as these are well-positioned to navigate uncertainty and deliver sustainable returns.
