Why 2026 will be a turning point for Asian fixed income

ASIAN fixed income, which has staged a quiet resurgence over the past couple of years, entered 2026 in a position of strength. Against a backdrop of rising US fiscal uncertainty, shifting global liquidity conditions and softening inflation across major economies, Asia stands out as a region defined by improving credit fundamentals, constructive monetary settings and a rapidly maturing fixed income ecosystem.

The proof points stack up. Asia’s macro environment remains broadly stable. Inflation across the region is largely contained; external balances are healthy; and monetary policies are either neutral or gradually shifting towards accommodation.

These conditions helped Asian fixed income deliver solid total returns – around 8 per cent for investment-grade (IG) strategies and more than 10 per cent for non-investment grade strategies in 2025. This performance that reflects not only cyclical resilience but also the structural evolution of the asset class.

At more than US$30 trillion in size, the combined Asia local-currency and US dollar bond markets now rival developed-market peers in depth and breadth. Yet they remain significantly underrepresented in global portfolios.

As US fiscal risks rise and volatility around major developed-market rate paths persists, Asia offers investors something increasingly scarce: a combination of yield, diversification, stability and improving credit quality.

Look for high quality and strong durability

Within the IG segment, the opportunity is better than at any point in the past decade. Asian IG’s strong long-term record versus US and European IG markets is well established, but what is most compelling today is the shift in credit quality that has occurred in recent years.

Five years ago, the universe leaned heavily towards issuers rated “BBB+” and below. Today, more than half of the index is rated “A-” or above, reflecting a steady pace of upgrades and healthier underlying fundamentals.

The region’s issuer profile also distinguishes it meaningfully from Western benchmarks. Sovereigns, state-owned enterprises and financial institutions make up more than 70 per cent of the index, providing a defensive tilt that has helped Asian IG consistently generate competitive returns with lower volatility.

Yield remains attractive on a duration-adjusted basis and demand is concentrated in the three to five-year segment, where investors are able to secure higher yields ahead of the anticipated rate cut cycle, while maintaining flexibility.

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As global fixed income markets grapple with stretched valuations and rising fiscal strains, Asian IG stands out as a higher-quality, more stable alternative.

Cleaner, more selective opportunity set

In non-IG grade, the transformation has been even more pronounced. The Asian high-yield (HY) universe has undergone a structural reset, becoming a fundamentally cleaner and more diversified set of opportunities.

The once-dominant Chinese property sector, which accounted for more than a third of the index at its peak, has been reduced to a mid-single-digit share.

In its place, sovereigns, quasi-sovereigns and frontier emerging-market issuers have taken on a larger role, improving the overall quality and reducing systemic vulnerabilities.

Frontier sovereigns such as Sri Lanka, Pakistan and Mongolia are benefiting from reforms anchored by the International Monetary Fund, stronger external balances and improving macro anchors, contributing to a low and contained default outlook. Countries such as the Maldives and Laos are also benefiting from improved conditions and rating upgrades.

With yields hovering around 8 per cent and durations near 2.5 years, carry remains the central driver of returns, offering meaningful breakeven protection at a time when global spreads remain tight.

Yet the nature of return generation is changing. The broad beta rallies of previous years have run their course and dispersion has narrowed. This means performance will increasingly depend on issuer differentiation, policy understanding and disciplined, bottom-up credit selection.

Favourable technicals a tailwind

Technical conditions across both IG and HY remain supportive. Net supply in Asian HY is expected to stay negative as refinancing needs continue to exceed new issuance, helping to stabilise spreads and providing a favourable backdrop for valuations.

Demand for short-duration, high-yielding assets remains strong globally, particularly as central banks pivot towards easing.

In IG, the steady and predictable issuance profile continues to be anchored by regional investors, creating a stable demand base that reinforces the asset class’s defensive characteristics.

Positioning for the year ahead calls for a combination of quality, carry and selectivity. In IG, the focus should remain on high‑quality sovereigns and quasi‑sovereigns, supported by the region’s increasingly robust ratings profile and attractive duration-adjusted yields

In HY, the most compelling opportunities are likely to be found in high-convexity credits, frontier reform stories and specific corporate turnarounds backed by improving balance sheets and credible policy frameworks.

With systemic risks receding and idiosyncratic risks rising, the advantage lies squarely with investors who can combine rigorous credit research with disciplined position sizing and risk control.

Asian fixed income is no longer simply a regional diversifier, it is becoming a strategic core allocation in global portfolios. For investors seeking resilient income, diversification and constructive fundamentals, it is increasingly difficult to ignore.

The writer is head of Asian fixed income, Fidelity International