SINGAPORE: Emerging Asia’s local-currency bonds are poised to rebound in 2026, according to Fidelity International and Bank of America Corp (BofA).
Investors see the backdrop improving on attractive inflation-adjusted bond yields and currency gains from Federal Reserve (Fed) rate easing, while light foreign positioning leaves room for global funds to rebuild exposure.
Emerging Asia local-currency bonds will perform strongly in 2026 due to currency appreciation and re-normalisation of carry, said Belinda Liao, a portfolio manager at Fidelity International.
Fed easing will lower US rates relative to Asian local rates, thus bringing back investors seeking carry, she added.
The potential improvement in Asian bond prospects comes at a crucial time for regional governments seeking to buoy their currencies even as they’re expected to loosen monetary policy.
Central banks in Indonesia, Thailand, South Korea and the Philippines are projected to cut rates by a cumulative 175 basis points by mid-2026.
This is according to a median of economists surveyed by Bloomberg.
Abhay Gupta, a strategist at BofA Securities in Singapore, sees one to three more rate cuts each from emerging Asia central banks, with Indonesia having the greatest room and dovish policy bias.
“Indonesia, the Philippines and India offer the best real yields in the region, and we remain bullish on the five-year bonds in these countries on scope for further monetary easing,” Gupta said.
A Bloomberg index of emerging Asian bonds has returned 3.70% this year, on track for the lowest return in three years, and less than half that from a similar Bloomberg gauge of global emerging market or EM bonds over the same period.
But going forward, the region is helped by muted inflation pressures, with price growth in India, Thailand, the Philippines and China below inflation targets, while Indonesia’s is comfortably within the target band.
For example, the spread between India’s 10-year government yield and the most recent inflation print rose to 638 basis points this week, the highest on record.
Foreign investors may send cash into the asset class, too, if they decide to bulk up from relatively low levels.
“Positioning is still light in emerging Asia’s local currency bond market,” said Homin Lee, senior macro strategist at Lombard Odier.
“The nascent recovery in inflows in emerging Asia will become more substantial next year if the benign market conditions we currently expect materialise.” — Bloomberg