Same market, new moves: Asia’s shifts in US debt investing

Recent conversations with customers highlight the continued interest Asia-based investors have in allocating their funds abroad. This diversification theme continues as Asia continues to invest into US treasuries, securitized products and syndicated bank loans to boost yields while also trying to mitigate associated credit risk. LSEG Pricing Service provides global independent and transparent evaluated pricing for global debt markets, supporting investor agility and compliance in volatile times. 

• Recent conversations with Asia-based investors indicate that they continue to view US dollar debt as an important strategic asset. They are also looking to add to high quality non-USD credit such as AUD and Danish asset backed securities.
• In dollar denominated assets, those investors are moving into US treasuries, Asset Backed Securities, and syndicated bank loans to seek higher yields abroad, while trying to minimise additional credit risk. The interest in Kung Fu bonds has also been high among Asian investors.
• LSEG Pricing Service provides evaluated pricing for government debt, securitised products, syndicated bank loans, and many other fixed income asset types across the globe.

Asia-based investors continue to invest in the US debt markets, including a growing demand for alternative assets such as Securitized Products – while maintaining investments into regionally domiciled bonds. We continue to see growth for Structured Notes aka Structured Products especially within the Wealth/Retail space, these include instruments such as Equity Linked Notes & others. “In 2024, over 93,000 non-flow structured products were issued across five major APAC markets, generating an estimated US$226.5 billion in sales, marking a 21% year-on-year increase. This growth is fuelled by rising interest in equity-linked instruments, hybrid structures, and capital-protected products.”

The fear of tariffs resulting in lower domestic economic activity – many emerging Asian countries currently run significant trade surpluses with the US – is also on the radar across Asia. So, the region’s investors are turning toward US government bonds, securitized products such as ABS (Asset Backed Securities) and MBS (Mortgaged Backed Securities), OTC Derivatives, and syndicated bank loans. They are also complementing this portfolio by adding to holdings in high quality foreign assets, such as AUD RMBS, USD/EUR CLOs (typically AAA tranches) and Danish MBS. 

Recent changes in US trade policy have introduced new tariffs on China since the beginning of this year. In addition, it has placed tariffs of 25% on steel and aluminum imports globally, and tariffs on Canada and Mexico. These tariffs are impacting Asia, especially on emerging markets, which are the most exposed to the US tariffs because of their complex supply chains, creating high export-to-GDP ratios with the US. All of this is expected to slow economic activity in 2025.

The investors indicated that there are several motivations for maintaining the balance on US dollar bonds, ABS and loans for the remainder of the year:

• In the Asian international bond markets, issuance remains sharply reduced from a 2021 level. Although issuance recovered some ground in 2024, there is still quite a way to go. Earlier expectations of strong issuance in 2025 have been hit by foreign outflows and market volatility (which often diminishes investor appetite) because of the US tariff policies. 
• On the other hand, issuance in USD debts remains robust, and 2024 was a very strong year for new debt brought to the market in these asset classes, adding to the liquidity available, and required, by these investors. US Dollar assets remain as a strategic asset for Asia, where countries have also been keen on striking trade deals with the US.

There are other issues that push Asia-based investors toward the US too, such as the difficulty in investing in China because of the currency restrictions, and the fact that Japan remains a relatively low-yielding environment. In contrast, the US is a highly liquid and transparent market, with the US dollar as a global currency for trade in goods. The US administration’s suggestion that it may deregulate its capital markets could increase its attractiveness further.

According to conversations with Asian investors, US treasuries remain as an attractive option, because they deliver yield (carry, stability) with lower risk as the USD remains the world’s reserve currency. 

These investors are also keeping their exposure to US collateralized mortgage obligations (CMOs) and residential mortgage-backed securities (RMBS), which deliver 70-80 basis points more than US treasuries. Also, they are considered very safe because agencies like Fannie Mae and Freddie Mac, which provide financing to mortgage lenders, have an explicit guarantee. More risk tolerant Asia-based investors are increasing their portfolio with alternative assets such as collateralized loan obligations and asset backed securities – including auto loans and credit card debt – because of the much higher yields, although these also have higher levels of credit risk. Additionally, with these riskier asset types, investors seek for in-depth transparency to justify their investment.