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Key takeaways:

• Asia remains relatively resilient despite heightened geopolitical uncertainty and higher energy prices.
• Strong credit fundamentals and supportive technical conditions continue to underpin Asia’s credit markets.
• Asia investment grade (IG) continues to offer defensive characteristics and diversification benefits within global fixed income portfolios.
• Asia high yield (HY) is benefiting from a healthier market structure, a favourable default environment and attractive carry opportunities.
• Active management and bottom-up credit research are likely to play a greater role in driving performance.

 

Asian credit markets enter the second half of 2026 facing a more challenging external environment. Trade tensions have faded, but investors now face a different set of challenges: geopolitical fragmentation, elevated energy prices and policy uncertainty have moved to the fore. 

Higher energy prices are forcing central banks across the region to reassess inflation expectations and policy paths, and the impact will not be evenly distributed (Exhibit 1). Economies that rely heavily on imported fuel, such as the Philippines, Thailand and India, face greater inflationary pressure and more pronounced external vulnerabilities than energy exporters. With the outlook for US-Iran relations remaining uncertain and geopolitical tensions persisting, energy markets could experience continued volatility in the months ahead.

Yet Asia enters this period from a position of relative strength. Many governments have maintained stronger fiscal positions, larger foreign exchange reserves and generally lower government debt burdens than many developed-market peers.

Regional policymakers also retain meaningful room to manoeuvre. Deep domestic savings pools, mature local funding markets and healthy external balances all provide buffers against external shocks. 

We expect regional growth to remain relatively resilient. While energy-importing economies may come under pressure, expanding intra-regional trade and investment should help offset a weaker global backdrop (Exhibit 2).

The build-out of AI infrastructure provides another important source of support. South Korea, Taiwan and Malaysia stand out due to their exposure to semiconductors, electronics manufacturing and digital infrastructure. Continued spending across the global technology ecosystem should support both corporate earnings and broader economic activity in these markets.

Overall, Asia’s structural strengths remain intact. Outcomes will likely increasingly diverge across countries and sectors, but the region’s underlying fundamentals should still provide a solid foundation for credit markets.

Supportive fundamentals and technicals

Credit fundamentals across Asia remain broadly stable. Over the past several years, many issuers have strengthened their balance sheets and extended their debt maturity profiles, thereby making them less sensitive to higher global interest rates.

Leverage remains generally well contained, and rating trends have improved markedly. Upgrades have comfortably outpaced downgrades in recent periods (Exhibit 3). Even if global funding conditions stay restrictive, most corporate borrowers appear well positioned to navigate the current environment.

The technical backdrop is similarly constructive. Many issuers have shifted funding activity toward domestic markets, leading to subdued net issuance in offshore US dollar markets. As a result, maturities and coupon payments have exceeded new supply, returning cash to investors and reinforcing favourable supply-demand dynamics.

We see little reason for this backdrop to change. Demand remains supported by deep domestic savings pools and a persistent investor preference for income-generating assets.

Taken together, stable fundamentals and supportive technicals should underpin Asia credit through the remainder of the year.

Asia investment grade: Durable and defensive

As concerns about developed markets’ fiscal sustainability and debt levels grow, Asia investment grade (IG) bonds are becoming more attractive as a diversifier in global fixed income portfolios — particularly with global credit spreads trading near the tighter end of their historical ranges.

Historically, Asia IG has exhibited lower volatility and shorter duration than many developed market credit sectors — characteristics that are particularly valuable amid elevated policy uncertainty and rate volatility.

At the same time, corporate fundamentals remain resilient, balance sheets are generally healthy, and credit quality has held up well (Exhibit 4). Strong regional demand and limited net issuance provide additional technical support. Together, these features position Asia IG well for investors seeking income, diversification and resilience amid an increasingly uncertain global environment.

Within the asset class, we favour financial issuers, particularly banks and insurers in Japan and Australia. We also see value in subordinated debt issued by high-quality corporates and select infrastructure-related credits. We believe these areas offer attractive income opportunities while maintaining a focus on credit quality.

Asia high yield: Attractive carry, stronger foundations

The Asia high yield (HY) market today is fundamentally different from what existed before the China property correction. The asset class is now healthier and far more diversified across both sectors and geographies.

Infrastructure, industrials, renewable energy and select quasi-sovereign issuers represent a larger share of the universe, reducing dependence on any single sector.

Corporate fundamentals remain supportive. Debt maturity profiles are manageable, domestic funding conditions are favourable in key markets (such as China and India), and rating improvements continue to outnumber downgrades across parts of the market. Default trends are particularly encouraging. We expect default rates to decline for a fourth straight year in 2026, with defaults outside the China property sector remaining exceptionally low at just 0.1% year to date (Exhibit 5).

In our view, Asia HY continues to offer some of the most attractive carry opportunities in the global fixed income market. At the end of June 2026, the asset class offered a yield-to-maturity of 7.9%, supported by improving credit quality and a much healthier market structure.

We favour issuers with strong access to domestic funding markets. These include select issuers in the utilities, industrials and energy sectors, where balance sheets remain relatively healthy, and refinancing risks appear well contained.

Resilient markets, selective opportunities

Asia credit is entering the second half of 2026 with several advantages. Fundamentals are sound. Technical conditions remain supportive. And opportunities exist across both IG and HY markets.

The investment environment, however, is becoming increasingly differentiated. Country-specific developments, sector dynamics and issuer-level fundamentals will matter more than broad market trends. Active management and rigorous bottom-up research will play a critical role in identifying opportunities and managing risk.

Resilience should continue to underpin Asia credit. Selectivity, however, is likely to become the defining driver of performance in the months ahead.

 

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Disclaimer

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