Opportunities in a fragmented world: emerging Asia’s bond markets

In Chart 3, we summarise the year-to-date policy rate movements and headline inflation rates for the six  emerging Asian markets we cover in this article (as at the end of September 2025). Inflation declined steadily in Malaysia, Thailand, Indonesia and the Philippines as energy and food prices stabilised. India’s inflation has also remained within its 2–6 percent target range. China’s readings have stayed low, reflecting subdued domestic demand. Inflation remains controlled in the region, while, based on a comparison of policy rates with the latest inflation readings, India and Philippines appear to be the two economies that have further room for monetary easing. 

Source: LSEG Workspace,data as of 30/9/2025. Past performance is not a guide to future returns. Please see the end for important legal disclosures.

According to the IMF, the economic outlook for the region remains positive, with regional growth forecasts upgraded twice so far in 2025 (Chart 4).

India, with a 6.6 percent projected growth rate in 2025, is the fastest-expanding economy in the group, supported by investment and consumption. Indonesia and the Philippines remain mid-range performers, while Malaysia and Thailand have returned to pre-pandemic growth rates amid recovering exports and tourism. China’s growth has moderated but remains steady, driven by infrastructure spending and selective policy easing.

Source: IMF, World Economic Outlook, October 2025. Past performance is not a guide to future returns. Please see the end for important legal disclosures.

Taken together, these trends show that by 2025 most economies in the region had achieved a balance between price stability and moderate growth — a stark contrast to the volatility that defined the 2020-2022 period.

The 7-10-year sovereign bond yield spreads of emerging Asian markets over US Treasuries have gradually narrowed post-pandemic. India, Indonesia and the Philippines continue to offer yield premia, reflecting higher perceived risk (Chart 5). The rest of the markets in the region did not follow the US interest rate cycle as aggressively: Malaysia has seen a less volatile yield spread over the period, eventually reaching a negative spread to US Treasuries in Q4 2023. Thailand and China moved to a negative spread a year earlier, reflecting lower peak interest rates in Thailand than in the US and a gradual decline in Chinese rates over the 5-year period. 

In Chart 6, we show the historical cumulative returns and volatility of emerging Asian government bonds, measured in unhedged US dollar terms, from January 2022 to September 2025. 

Over this period, Malaysian and Thai government bonds delivered outstanding US dollar returns when compared to regional and global emerging market peers, largely due to these markets’ relatively stable currencies. India, Indonesia and the Philippines, which are perceived as higher-yielding markets, experienced a weaker currency performance over the period, eroding much of the return when measured in US dollar terms.  

Source: FTSE Russell, data from 31/1/2022-30/9/2025. Past performance is not a guide to future returns. Please see the end for important legal disclosures. 

For external investors in emerging Asian bond markets, currency risk remains a critical topic, as 2025 has demonstrated (Chart 7). In the year to date, the Thai baht (THB), Malaysian ringgit (MYR) and Chinese yuan (CNY) have strengthened against the US dollar, while the Indian rupee (INR), Indonesian rupiah (IDR) and Philippine peso (PHP) have weakened. Below, we examine these currency movements in more detail. 

Source: FTSE Russell, data from 31/12/2024-30/9/2025. Past performance is not a guide t

Source: FTSE Russell, data from 31/12/2024-30/9/2025. Past performance is not a guide to future returns. Please see the end for important legal disclosures. 

For investors holding Asian local currency bonds, one current attraction is real yield. As seen in Chart 8, emerging Asian markets ranked the highest against developed Asian markets (such as Singapore, South Korea, Hong Kong and Japan) and other developed markets (such as US, UK and Australia) in real yield terms. In summary, the relatively high inflation rates in major developed markets are making Asian local currency bonds more appealing. 

Above, we looked at the year-to-date divergence in the performance of emerging Asian currencies against the US dollar. However, over the past five years, most emerging Asian currencies have depreciated against the dollar, particularly during the period encompassing the Federal Reserve’s sharp interest rises (in 2022—Chart 9). 

The Philippine peso (PHP), Indian rupee (INR) and Indonesian rupiah (IDR) were the major underperformers over five years: indeed, Indonesia and Philippines have delivered the most rate cuts among emerging Asian markets since June 2024. 

In addition, foreign portfolio outflows and domestic political uncertainties in both countries have weighed on their respective currencies. The Malaysian ringgit (MYR) outperformed its regional peers and performed almost in line with the US dollar over five years, reflecting Malaysia’s relatively resilient growth. Since mid-2024, Malaysia’s central bank has only delivered a 25 basis point, pre-emptive rate cut at its July 2025 meeting, citing this as a precaution against global trade uncertainty and marking one of the shallowest interest rate cycles in Asia. 

The Indian rupee depreciated against the US dollar by 20.3% over 5 years and 3.7% in the year to date, lagging other emerging Asian currencies. In Chart 10, we show that foreign investors have been net sellers of Indian equities since Q3 2024, reportedly reacting to high perceived valuations, and this has coincided with weakness in the rupee. 

However, net foreign purchases of Indian government bonds have remained stable since early 2024, despite the relative weakness of the rupee. This may reflect the growing openness of India’s domestic bond market to outside investors: as a result of improvements in the market accessibility level of India, FTSE Russell announced in October 2024 that it would be including Indian government bonds in the FTSE Emerging Markets Government Bond index with effect from September 2025.

More recently, a slowdown in India’s growth outlook, driven by slower infrastructure spending, and uncertainty regarding US trade policy has further weighed on the Indian currency. Recent geopolitical developments continue to put downwards pressure on the rupee: external headwinds, including tariff uncertainties and the US’s more restrictive new H-1B visa policies, have weighed further on market sentiment, leading to three consecutive months of foreign equity outflows from July to September 2025. 

Over the past five years, Asia’s US dollar credit markets have transitioned from an extended period of low yields to a higher-yield environment. When compared to US investment grade (IG) credit, the Asian US dollar IG credit yield premium no longer exists, meaning there’s no additional risk compensation for investors in investment grade Asian US dollar bonds (Chart 11).

However, an increasing number of investors are now turning to the Asian local currency bond markets. In Chart 12, we summarise the risk-return characteristics of different categories of Asian bonds during the five years to September 2025, with the returns and volatility of US Treasuries and investment grade US dollar bonds shown for comparison. 

Among the categories, emerging Asian local currency government bonds delivered the highest total return over the period, outperforming both regional credit sectors and US dollar-denominated bonds, despite US dollar appreciation during the same period. 

Asian emerging market US dollar agency bonds ranked second in return terms after local currency bonds. Overall, these two categories provided the most resilient and consistent outcomes among Asian fixed income categories over the period. 

Source: FTSE Russell, LSEG, data from 30/9/2020-30/9/2025. Past performance is not a guide to future returns.*ALBBI stands for FTSE Asian Local-currency Broad Bond Index Series. As of 20250930, the series includes China, Hong Kong, South Korea, Singapore, Malaysia and the Philippines.  

One of the characteristics of Asian corporate and agency bond markets is their relatively shorter duration. In Chart 13, we compare the yield pick-up per unit of duration across Emerging Asia and the US bond markets as of October 2025. 

At that date, Asian US dollar investment-grade corporates offered over 150 basis points of yield per unit of duration more than their US peers. Among sovereign issuers, Indian government bonds offered over 250 basis points of yield per unit of duration relative to their regional peers. Overall, Asian credit markets currently offer higher yield compensation relative to their duration risk.