2026 Fixed Income Outlook: Credit Resilience Driving Yield Opportunities

Asian corporate dollar bond are expected to deliver solid performance in 2026, supported by improving corporate credit profiles, declining US rates, persistent de-dollarisation
Investment-grade bond returns likely to come from carry as US Treasury yield curve steepens
Indian firms see rating upgrade potential; robust demand for Chinese TMT bonds, HK insurance bond valuations compelling
Asian high-yield corporate dollar bond default rate to stay low, with attractive yields; remain vigilant towards Chinese property bonds

In 2026, the outlook for the Asian dollar corporate bond market remains constructive, buoyed by improving corporate fundamentals, easing US rates, and ongoing de-dollarization. The Fed lowered rates three times consecutively in 2025. The market largely expects a continued moderate decline in rates this year, driven by a slowing job market and political pressure. However, given resilient US economic growth, inflation is likely to remain elevated, leaving limited room for yields to fall. Against this backdrop, returns from Asian investment-grade dollar bonds are expected to come primarily from carry rather than from credit spread tightening.

The US Treasury yield curve is gradually steepening, with the front end influenced by rate movements, while the back end may trend higher due to ballooning debt levels, inflationary pressures, and mounting government bond supply. The normalisation of Japanese interest rates is prompting liquidity to return to the domestic market, which in turn could send US Treasury yields higher. This suggests that the returns from investment-grade dollar corporate bonds will come mainly from carry. Credit spreads may have limited room to narrow further in the short-term following the significant tightening seen in 2025.

Source: httes://home.treasury.gov/ as at 19 December 2025

Within Asian markets, demand for certain sectors continues to be in focus. Mainland China's economy remains stable, while inflation showed signs of rebounding at the end of 2025. The Central Economic Working Conference proposed a more proactive fiscal policy and moderately accommodative monetary policy, while emphasising technological innovation as a key focus area. Investor demand for technology, media and telecommunications (TMT) bonds remains robust, driven by limited supply, solid credit fundamentals, and compelling yields. Despite a challenging external environment, credit performance in this space continues to exhibit resilience.

Hong Kong insurance credits also warrant attention. Some insurers experienced significant growth in new business sales and credit rating upgrades, reflecting low leverage and stable earnings growth. Overall, insurance bonds are characterised by stable credit profiles and appealing valuations.

In India, its third-quarter economic growth sharply exceeded market expectations. The International Monetary Fund indicates that the country is characterised by robust economic fundamentals and a stable medium-term outlook. S&P’s recent upgrade of India's sovereign credit rating had enabled companies to raise funds at lower costs from offshore markets, thereby strengthening credit fundamentals. The market expects more companies may see rating upgrades in the future, boosting investor interest in this space.

The outlook for high-yield bonds in 2026 is equally positive. Bolstered by easing US rates, persistently low default rates, and attractive yields, the prospects for Asian high-yield dollar corporate bonds remain favourable. Some Chinese industrial companies redeemed bonds early and issued new ones, with the latter oversubscribed, underscoring solid market demand. In addition, some firms voluntarily repaid loans ahead of schedule to reduce debt levels and improve credit profiles. In contrast, risks in property-related bonds remain elevated. Some developers sought extensions on bond repayment, prompting market concerns over default risk. Investors should adopt a cautious stance towards Chinese property bonds, particularly those with higher default risk.

Indian high-yield bonds has also present multi-faceted potential, attracting growing investor attention. Following India's sovereign rating upgrade, some corporate bonds may have the opportunity to be upgraded from high-yield to investment-grade. Meanwhile, regulators have relaxed foreign investment restrictions in the financial sector, spurring participation from global institutions. In the banking sector, non-banking financial companies (NBFC) have a higher proportion of retail loans than traditional banks, driving faster loan growth. In 2024, retail loans accounted for nearly 48% of NBFC's total loan volume, compared with just 34% for banks. Data from a consulting firm indicates that India's NBFCs loan growth is anticipated to reach 17% in the first six months of this fiscal year, exceeding the 12% growth projected for traditional banks, highlighting the sector's persistent growth potential.

Mongolia's corporate bonds are also characterised by stable credit fundamentals. Some companies have outlined their refinancing plans in non-deal roadshows and bolstered market confidence by reassuring investors of sufficient liquidity to meet bond payments. More companies are expected to pursue refinancing, which should further enhance their credit profiles.

In general, the outlook for the Asian corporate dollar bond market remains favourable in 2026. For investment-grade bonds, returns are expected to come primarily from carry amid declining US rates and a steepening yield curve. Sectors such as TMT and insurance are likely to remain in demand, while Indian companies offer potential for rating upgrades. In the high-yield space, default rates remain low, with yields staying attractive. Certain industrial, financial, and frontier markets present investment opportunities, but property-related bonds continue to warrant caution.

With declining US rates, a softer dollar, and the persistent trend of de-dollarisation, the Asian credit market in 2026 is poised to extend the stable performance achieved in 2025. Improving corporate credit profiles, limited supply, and appealing yields are among the factors that underpin the market's constructive outlook in this space.