Resilient and rising: APAC LCY bond markets remain strong amid USD pivot

The first in a series of industry insights, this article comes as TraditionData strengthens its market data offering in fixed income, FX and rates in 2026. With data product developments including Japanese retail FX flow, central and northern European swaptions, Asia fixed income, and Asia hours repo pricing, TraditionData is actively responding to industry developments and needs with market-leading solutions.

Summary:

• Asia’s local currency markets have been growing strongly for decades.
• They received a further boost this year as investors pulled back from US Treasuries following the introduction of new trade tariffs.
• Funding costs in local markets have become comparatively cheaper as currency values have strengthened.
• Many frontier markets have been receiving ratings upgrades, providing additional comfort for investors looking to tap into them.
• With uncertainty remaining high, investors should have the right data and tools in place to make the best of emerging opportunities.
• Asia’s local currency bond markets have grown strongly over the past few years, as monetary policy has eased and the US dollar has weakened.

Asia’s local currency bond markets have grown strongly over the past few years, as monetary policy has eased and the US dollar has weakened.

They received a further boost in April, when many investors pulled out of US Treasuries as President Donald Trump’s swingeing trade tariffs sent markets into a tailspin. Such sentiment does not look as though it is about to go away.

However, there are several macroeconomic and geopolitical risks on the horizon that warrant close monitoring, too. These include lingering concerns over the long-term health of the global economy, continued geopolitical tensions, interest rate volatility amid fiscal uncertainty and idiosyncratic market behaviour.

“Asia’s emerging markets enter 2026 with a mix of opportunities and challenges. While geopolitical risks and fading external demand weigh on growth prospects, low inflation and accommodative monetary policies provide a supportive backdrop for local currency bonds,” says Yifei Ding, Senior Portfolio Manager for Invesco Fixed Income.

According to the latest Asia Bond Monitor (ABM) report, published by the Asian Development Bank, local currency bonds outstanding across most of Asia (excluding Japan and India) rose 3.2% in the third quarter of this year, up from 3% on the year before. The report indicates that China was the biggest driver of this expansion, while ASEAN countries also increased their contribution.

This is generating a lot of interest from investors, especially in areas that have a good credit rating.

“The outlook for Asia investment grade credit in Q1 2026 remains broadly positive, building on the resilience seen throughout 2025. This is supported by anticipated US rate cuts, robust regional economic growth, and favourable technical dynamics. Asian IG credits are expected to deliver stable returns with attractive carry potential,” says Chris Lau, another Senior Portfolio Manager for Invesco Fixed Income.

He adds that “portfolio strategy should maintain defensive positioning and focus on yield carry”.

Cheaper funding

Asia’s local currency bond market has been growing strongly for decades. Last year, the ABM reported a 9.6% year-on-year growth rate, with total market size reaching US$25.1 trillion. This is fairly consistent with the pace of growth that has been seen in previous years.

While growth has slowed, it has not fallen away altogether. In 2022, despite tighter liquidity and higher borrowing costs, Asia’s LCY bond markets still managed to record a respectable 7.6% year-on-year growth.

One of the reasons for a resurgence in the LCY bond market is that many currencies in the region have risen significantly against the US dollar over the past 12 to 18 months. This has meant funding in the local markets is now comparatively cheaper than it was. At the same time, the Japanese yen – another favoured currency for Asian firms looking to raise finance – has also fallen in value.

Ratings for Asian emerging market credit are also steadily improving, providing an extra level of comfort for global investors.

“Every two or three weeks we are seeing a credit rating agency upgrade a sovereign in Asia, as well as associated corporate and financial upgrades,” says Lei Zhu, Head of Asian Fixed Income for Fidelity International.

A recent report from the OECD says that in 2024 there were 52 upgrades of emerging market sovereigns compared to 21 downgrades, although the report doesn’t specifically focus on Asia. This is the first time that the number of upgrades has exceeded the number of downgrades since 2019.

As a result of this investor interest, “there is now less need to issue in US dollars,” says Zhu.

She adds: “The US dollar market is shrinking, mainly driven by less supply, and there is an alternative source for funding through the local Asian currencies.”

Trump’s tariffs

One of the most impactful events for Asia’s local currency bond markets this year came out of the US, when Trump decided to impose far-reaching trade tariffs on much of the rest of the world.

While the imposition of the tariffs had been widely anticipated, the way this affected global bond markets was a surprise.

Many presumed that the resulting equity sell-off would trigger a flight into US government paper, as often happens during times of market upheaval.

Instead, a sudden surge in yields on five- and ten-year US Treasuries sent fixed income investors scrambling for emerging markets.

A former chief operating officer at a regional bank describes this as “a rare occurrence during a market crisis”, and this has not unwound yet.

“Ever since ‘Liberation Day’, we have been seeing increasing demand for Asian local currency, high quality government bonds from other investors [those outside the region] for diversification purposes,” says Zhu.

An interesting observation that Zhu makes is that global investors are increasingly choosing not to hedge their investments in Asian debt markets back into the US dollar, as they might have done previously. This is partly a reflection of how a weakening dollar has increased the cost of cross-currency hedging, but also that many investors are keen to take a bet on the appreciation of the underlying currency itself.

Many markets

The outlook for Asia’s local currency bond markets looks promising, as firms shift away from US dollar funding and regional debt looks increasingly attractive for investors.

However, with uncertainty and volatility rippling across global financial markets, paying close attention to key market indicators has become more important than ever.

For investment grade debt, this means looking at things such as inflation projections, balance of payment figures and what might happen to interest rates going forward. For more frontier markets, credit ratings from established agencies also play a critical role.

“Current market conditions prevent us from making a generalised outlook for Asia’s emerging markets,” says Ding, although he adds that “fundamentals remain strong among countries with lower fiscal impulse”.

As monetary policies start to ease, there is strong potential for government bond yields across the region to fall. This may depend, however, on whether governments are tempted to increase borrowing as interest rates fall.

“A negative supply shock from aggressive fiscal expansion could yet unsettle market participants, prompting a shift toward other emerging markets offering more attractive carry and capital gain potentials,” says Ding.

The Asian local currency markets can be a rewarding space to be in at the moment, but investors need to be armed with the right tools to maximise their returns and head off any unwanted surprises.

“Data becomes very important,” says Zhu.