UBS fund manager says Asia junk bond rally has further to go

ASIAN junk bonds are poised to rally again this year and extend their outperformance over US peers, as lower leverage keeps default risks in check, a top regional investor has said.

The bullish view is driven largely by attractive valuations and a recovery in Asian credit fundamentals, said Raymond Gui, head of Asia fixed income portfolio management at UBS Asset Management, in an interview.

Many Asian companies have used favourable funding conditions in recent years to cut debt or to refinance maturing dollar bonds with longer-dated issues or domestic borrowings, he added.

Asian high-yield bonds have posted robust gains over the past two years as investors focused on solid yields, shorter maturities and improving company finances despite geopolitical tensions.

The optimism is carrying into this year, with healthier balance sheets, less reliance on US assets and renewed opportunities in China.

Gui, whose fund focusing on high-yield Asia notes beat 99 per cent of peers in the last 12 months, said: “A lot of Asian high-yield companies have successfully reduced their leverage.

“We expect default risk to remain low this year, like in 2025. This will be a key driver for the Asian high-yield market to perform well again.”

Asia’s junk bond market is off to a promising start in 2026, with a key index of Asian high-yield debt up 1.8 per cent after having returned 9.5 per cent in 2025. Since the end of 2023, it has outperformed US and euro-denominated junk bonds by 10 and 13 percentage points, respectively.

“There is a good chance for Asia high yield to outperform US high yield this year again,” Gui said; he added that he expects default rates for the region’s junk bonds to stay below 1 per cent by market value.

SEE ALSO

Emerging market bonds: Resilient amid slower rate cuts

His optimism is shared by other credit investors, who also expect improving economic conditions in the region and emerging opportunities in China.

Moody’s Ratings projects the global corporate default rate to fall to 2.2 per cent by December 2026, from 4.1 per cent at the end of 2025. Defaults in the Asia-Pacific fell to just three last year from seven in 2024, underscoring the region’s resilience.

Meanwhile, Asia’s junk bonds offer better valuations than US and European peers, Gui said. Bloomberg indexes indicate that Asian junk bonds offer at least an 80-basis-point premium over their US and European counterparts.

Tight spreads

One risk that is hard to predict is the timing of a US or global recession. If it does hit, risky assets across the board would fall, Gui said, though his firm does not expect a recession to be the base case for 2026.

Still, recent swings in stocks, metals and other assets this year have fuelled worries that valuations may be stretched, a concern echoed in credit markets, where spreads globally over Treasuries hover near multi-decade lows.

Julio Callegari, chief investment officer of Asia fixed income at JPMorgan Asset Management, who noted that he likes Macau gaming bonds and Indian renewable debt, said: “High-yield spreads in general are at historically tight levels, and therefore investors should tread with some caution at this point.”

Still, Gui sees opportunities for excess returns in Greater China, where some corporate notes remain priced below fundamentals.

The distress at China Vanke Co, one of the few major Chinese property firms to have avoided default so far, points to troubles persisting in the sector. But improving sentiment, reflected in last year’s stock rally, is also flowing into the nation’s high-yield market, he said.

Gui said: “There are also certain investors who can bear some draw-down volatility. They typically have a higher risk appetite and a higher return expectation. In this environment, Asian high yield will be a good fit for them this year.” BLOOMBERG