Q2 2026 Fixed Income Outlook: Navigating Geopolitical Volatility and Asia

Stay constructive on Asian credit despite Middle East instability; vigilant on oil-related names
Asian companies face minimal refinancing risk, limited credit impact from Middle East conflict; investors expected to buy on dips
Chinese TMT, SOE investment-grade bonds resilient; Opportunities emerge across Indonesian sovereign, quasi-sovereign
High-quality issuers preferred within Chinese property bonds; rising commodity prices benefit related Indian bonds

Middle East conflict has limited credit impact on Asian corporate issuers, thought volatility is expected to persist

The US-Israel military action against Iran has sent oil prices surging, sparking investor concerns about inflation. March CPI jumped 0.9%, the largest monthly increase since 2022; though core CPI increased only 0.2% on a month-on-month basis. Recent macroeconomic data highlight potential risks of softening consumption and slower job growth, which may support the Fed's stance of maintaining current interest rates. Only a persistent rise in long-term inflation expectations and stronger wage growth would likely justify further rate hikes.

Heightened geopolitical tensions make volatility across Asian bond markets inevitable. However, Asian credit maintains a broadly constructive tone, with Asian investment-grade and high-yield dollar bonds showing resilience. Given current solid fundamentals and lower refinancing risk, certain market pullback may be viewed by investors as a buying opportunity.

Source: U.S. Bureau of Labor Statistics, as of April 21, 2026
Data unavailable for October 2025 due to the Federal Government shutdown.

Asian investment-grade bond credit spreads remain resilient despite geopolitical turbulence

Credit spreads of Asian investment-grade dollar bonds have remained resilient despite geopolitical turbulence. While oil-related issuers and countries bear the brunt of the tension, producers and refineries account for less than 8% of the reference index. Consequently, the overall effect appears contained for now. US Treasury yields movement remains the key driver, but given limited issuance and stable fundamentals, investors may buy on dips if the market retreats.

China

The Middle East conflict has led some investors to rotate into Chinese credits, providing support for investment-grade bonds issued by technology, media and telecommunications (TMT) and state-owned enterprises (SOEs). While AI remains strategic priority, the fundamentals of Chinese TMT bonds appear solid. Recent quarterly results suggest healthy balance sheets and ample net cash positions among major technology firms. Despite geopolitical turmoil and strained US-China trade relations, China's latest economic data have shown signs of improvement: first -quarter GDP grew by 5%, the Production Price Index turned positive for the first time since 2022, while retail sales and industrial output also rose.

South Korea

South Korean banks maintain solid fundamentals. Capital adequacy, liquidity, and foreign exchange risk exposure are subject to strict regulatory scrutiny, reducing excessive risk-taking. During periods of stress, the government provides liquidity support to banks. Among South Korean financial bonds, opportunities can still be found in select AT1 and securities bonds due to reasonable valuations, whereas valuations of other areas are less compelling.

India

India's macroeconomic backdrop remains favourable. Investment-grade dollar bonds continue to show resilience, with companies tendering bonds early to reduce supply. Following S&P's sovereign rating upgrades, several corporates have also seen their ratings raised. According to India's credit rating agency CRISIL, approximately 500 firms had their ratings upgraded as of September, including infrastructure and renewables, representing 14%, above the 10-year average of 11%. While further upgrades are anticipated, they remain dependent on sustained economic momentum.

Source: Crisil Intelligence, as of September 30, 2025

Indonesia

Indonesia's rating outlook has been adjusted to reflect policy downside risks, though fundamentals remain intact. The fiscal deficit target is set at 2.68% of GDP, with spending cuts under consideration. Sovereign and quasi-sovereign bonds present opportunities after recent pullbacks, but caution is warranted for oil-related names.

Asian high-yield dollar bond: volatility inevitable, limited impact seen from conflict

The Middle East conflict appears to have a limited impact on Asian high-yield bonds, as few issuers have direct revenue or operational ties to the region. While short-term fluctuations are unavoidable, high-yield bonds could continue to benefit from improving fundamentals, low default rates, and limited supply. Some investors may view volatility as a window to selectively accumulate positions.

China

China's property bonds remain under pressure as uncertainty surrounding a major developer's refinancing plan continues to weigh on sentiment. New home sales remain lacklustre, despite month-on-month improvement. To support the sector, Shanghai has eased restrictions on non-resident home purchases, while Shenzhen is reportedly drafting a rescue package for a distressed developer, consistent with the “no default” policy. A full recovery in China's property sector will take time, but high-quality issuers are preferred.

Macau

Despite external weakness from war, Macau gaming bonds have been considerably resilient, supported by technical factors. March gross gaming revenue rose 15% year-on-year, outpacing February's growth. The overall industry remains stable, with diversified financing channels. Deleveraging progress is notable: one operator reduced debt by US$600 million in the fourth quarter compared with the previous quarter, and continued lowering debt in the first two months this year. S&P noted that deleveraging progress will determine the timing of credit rating recovery.

India

As a major oil importer, India has seen weaker sentiment among select high-yield bonds, particularly those with weaker fundamentals. However, sectors such as renewables, commodities, and infrastructure remain relatively resilient. India's structural growth prospects help underpin the fundamentals of various industries. Infrastructure investments in railways and power grids, remain robust, driving development in the industrial and steel sectors. Rising urbanization and economic growth increase energy demand, especially renewables. Elevated commodity prices, including aluminium and iron ore, support earnings prospects of related Indian bonds.

Conclusion

The Middle East conflict and oil price volatility may continue to trigger short-term fluctuations across Asia's investment-grade and high-yield bond markets. However, solid fundamentals, limited credit impact at the corporate level, and minimal refinancing risk suggest that investors will likely view market pullbacks as opportunities to accumulate positions. In this environment, disciplined credit selection and a focus on quality issuers remain essential to navigating volatility and capturing long-term value.