Tight Supply Supports Asian Investment-grade USD Bonds

Rate cuts are channeling flows into higher-yielding Asian IG credit
Asian corporates are shifting to cheaper local-currency funding, shrinking USD Asia credit supply
Some issuers are redeeming USD bonds early at a premium, adding extra investors returns

The Fed lowered interest rates by 25 basis points and signalled the potential for two additional cuts later this year. A downward rate trajectory will likely push US Treasury yields lower, benefiting Asian investment-grade dollar bonds.

To understand why US rate cuts support Asian credits, it helps to grasp two key principles. First, bond prices and yields move in opposite directions. Second, once a bond is issued, its coupon remains fixed—what fluctuates is its price. When interest rates decline, issuers can issue new bonds at lower coupons, which are less attractive than old bonds. This prompts investors to opt for old credits with relatively appealing yields, sending existing bond prices higher. Notably, long-duration bonds are more sensitive to interest rate changes than short-term ones, meaning long-end bonds have greater price appreciation potential in a rate-cutting cycle.

Asian investment-grade dollar bonds are typically priced relative to US Treasuries, which are considered one of the low-risk asset classes. Because Asian investment-grade corporate bonds carry a higher risk profile than US Treasuries, issuers must offer higher coupon rates to attract investors. When interest rates decline, liquidity tends to shift towards risk assets with higher return, driving the performance of Asian credits.

Meanwhile, supported by accommodative monetary policies from many Asian central banks, companies can turn to local currency markets to raise funds at lower costs as an alternative to tapping the dollar bond market. This has led to a continued decline in outstanding issuance in the Asian dollar bond market. Net issuance of Asian dollar bonds has also been negative for three consecutive years, and this year will likely remain subdued. The supply of long-duration bonds is particularly scarce, with 30-year issuances accounted for just 1% and 3% of total new issuances in 2023 and 2024, respectively. Dwindling supply has been outstripped by strong demand, buoyed by Asian dollar bonds' solid credit fundamentals and attractive yields, providing technical support to their bond prices. Additionally, some Asian issuers raised funds onshore at lower costs to repurchase their dollar bonds early—reducing leverage and further tightening supply . In certain cases, buybacks are even conducted at a premium, offering investors the potential for alpha.

Recently, local currency strategies involving the EUR, AUD, RMB, and SGD are also presenting attractive investment opportunities. Beyond dollar bonds, some Asian corporates also issue euro-denominated bonds, which offer wider and more compelling credit spreads compared to their dollar counterparts. Investors can choose to leave the currency exposure unhedged if they anticipate appreciation, capitalising on both currency gain and credit spread. Alternatively, if their outlook on the currency is bearish, they can hedge the exposure to mitigate currency risk and focus solely on capturing the credit spread.

Chinese TMT, Japanese and Taiwanese life insurance bonds offer appealing yields

With China's macroeconomic outlook stabilising and a series of stimulus measures being rolled out, the credit fundamentals of the country's technology, media and telecommunications (TMT) sector are showing gradual signs of improvement. While credit spreads have tightened considerably, yields remain more alluring than those of state-owned enterprises with comparable credit ratings. Leading industry players continue to report revenue growth, and most of them maintain strong net cash position, underscoring robust debt-servicing capacity. Elsewhere in the region, investment-grade bonds from Japanese and Taiwanese life insurers also offer appealing yields. Credit fundamentals of Japan's life insurance sector remains sound. According to Fitch, Japanese lifers' capital adequacy remains stable, supported by strong core capital and the widespread use of hybrid capital issuance, reinforcing credit fundamentals.

As the Fed resumes its rate-cutting cycle, interest rates are expected to shift towards a more neutral stance, helping to bolster the performance of Asian investment-grade bonds. Investors may consider positioning early to lock in compelling yields.