Asian credit spreads denominated in U.S. dollars have held up surprisingly well since the tariff announcements in early April, retracing nearly 100% of the spread widening in the intervening months (Figure 1). This post examines five factors supporting the recent performance of Asian investment grade credit spreads and why that support should persist going forward.
Figure 1
Asian investment-grade spreads tightened more than 30 bps since early April, but have yet to return to their YTD tights.
Source: Bloomberg and J.P. Morgan, based on J.P. Morgan’s JACI IG credit spreads.
#1: Behind the Growth in Local Currency Issuance
The U.S. dollar declined against most Asian currencies through the first half of 2025. As this occurred, Asia-based corporate and non-sovereign issuers increased their bond issuance in local currencies, curtailing their dollar-denominated issuance and consequently supporting USD spreads on their tightening trajectory.
Meanwhile, subsiding inflation pressures provided Asian central banks with the room to cut policy rates, further incentivizing issuance in local currencies. In contrast, the Federal Reserve remained in a holding pattern throughout the first three quarters of 2025 (see the blue shaded column in Figure 2). These policy rate differentials may persist if the Fed struggles to drop rates into accommodative territory—even as labor conditions deteriorate—considering the tariff-related inflation effects on the U.S. economy.
Figure 2
As the Fed held rates steady through most of 2025, Asian central banks eased monetary policy, improving issuers’ cost of capital. The Fed may struggle to cut rates into accommodative territory amidst tariff-related inflation effects.
Source: Fed Funds estimates and neutral policy estimates are from PGIM. Fed funds data are from the Federal Reserve. Aggregate Asia ex-Japan policy rates and estimates are from Morgan Stanley.
Indeed, the Reserve Bank of India has cut rates three times in 2025, and corporate issuance in India’s local bond market has grown by 25% to INR8.3 trillion since this time last year. Similarly, Bank Indonesia cut its policy rate three times this year, taking it from 6.0% to 5.3%, and corporate issuance in Indonesia’s local market is up 39% year-over-year to IDR84.4 trillion.
Issuance in Hong Kong’s local bond market (denominated in HKD) also staged a revival this year amidst lower borrowing costs. The Hong Kong Monetary Authority conducted a series of currency interventions to maintain the peg against the USD, which saw overnight borrowing costs fall to nearly zero.
#2: Funding Cost Differentials
The context from our first point dovetails into our second, which pertains to funding cost differentials between onshore local Asian markets and the U.S. dollar-denominated market. After U.S. interest rates repriced higher in 2022 and 2023 amid the Fed’s policy tightening cycle, higher funding costs also dissuaded issuers from coming to the USD market.
For example, the panels in Figure 3 show the hedged yields for similarly rated issuers in Indonesia, China, and South Korea. Hedged yields show noticeable savings for issuers who stay onshore in Indonesia and China (top panels of Figure 3). Although South Korean issuers might be indifferent between onshore and offshore issuance considering nearly equivalent levels, this also represents a change as historical USD funding costs are often lower than onshore costs for South Korean issuers (bottom panel of Figure 3).
Figure 3
Funding cost differentials may provide incentive to issue in the local onshore Indonesian and Chinese markets, while South Korean issuers may have their pick between onshore and USD whereas the latter is often cheaper.
Source: Bank of America Merrill Lynch
#3: Asian Investors Still Anchoring Demand
Within EM debt mandates, global investors are generally maintaining their underweights in Asia, with the exception of India. Despite the broad underweight positioning, demand from traditional sources, such as Chinese banks as well as South Korean, Japanese, and Taiwanese life insurers, remains strong given that these regional buyers have historically anchored demand for Asian USD bonds. Considering the aforementioned dynamics of unfavorable USD funding costs relative to local currencies, demand from these anchor investors may strengthen amidst the dearth of USD supply.
As an example of this consistent demand, Figure 4 shows the performance of select Chinese and South Korean hard currency issues thus far in 2025. Following early April’s spread widening, Chinese A rated spreads quickly compressed inside of their YTD tights, while China BBB spreads returned to their YTD tights by early August. Within China’s BBB segment, tech names stand out as outperformers, compressing from an average spread of about 100 bps over government debt to about 60 bps. A similar trend is evident in South Korean IG spreads with both A and BBB rated names retracing almost all of their widening since early April. In addition to ongoing demand from Asian-anchor investors, this year’s spread recovery also indicates that investors appear to be putting aside their worries on China’s slowdown and on U.S.-China trade tensions.
Figure 4
Asian IG credit spread performance indicates the continued presence of Asia’s anchor investors as well as fading concerns about China’s economic recovery and its U.S. trade relationship.
Source: Bloomberg and PGIM
#4: Stable aggregate demand vs. shrinking stock of Asian HC bonds
Asia’s large anchor investors are part of an estimated US$3.5 trillion of aggregate demand in Asian countries for non-domestic bonds, including for developed market issues.1 This demand has been more apparent in recent years as Asian investors increased their 2025 allocations to USD Asian bonds to the highest level since 2021 (Figure 5). This aggregate demand from Asian countries should also support Asian dollar-denominated spreads considering the diversification of issuance into local markets and the corresponding lack of dollar-denominated supply.
Figure 5
Asian investors increased their allocations to a contracting USD Asian debt market to a multi-year high thus far in 2025.
Source: J.P. Morgan
As the size of the Asian USD credit market contracts, we have also observed greater participation by Chinese institutions in recent investment grade transactions out of the Middle East (Figure 6). We think net creditor Asian countries—i.e., China, South Korea, Japan, etc.—will likely continue deploying cash in global EM amidst the uncertainty pertaining to U.S. monetary, fiscal, and political policies.
Figure 6
Asia’s USD credit market has been contracting since late 2021.
Source: Morgan Stanley
#5: Net supply perspective
The contraction in Asia’s USD credit market over the past several years appears set to continue with flat net supply thus far in 2025. Asia’s credit market absorbed US$106 billion in supply year-to-date, essentially matching its U.S. dollar-denominated maturities.
However, the region’s net supply picture is more nuanced by country. At the start of the year, Asia was facing US$166bn of aggregate bond maturities, of which US$101 billion was from China and US$23 billion was from Korea. Thus far in 2025, China has had negative net supply of US$36.5 billion, by far the largest Asian country in terms of supply deficit. Furthermore, the contribution of China’s issuance to Asia’s total YTD supply stands at 36%, below 2024’s contribution of 40% and well below historical peaks of about 60% observed between 2017 to 2021.
China’s negative net supply has positively affected spreads on China-related issuers, creating a pool of demand as existing bonds mature. This demand is driven by Chinese banks and local asset managers, who have home bias and prefer to invest their USD holdings in Chinese companies.
When looking ahead, we think a combination of all the five factors specified above are unique to Asia’s credit markets, and provide areas to monitor as the global investment landscape evolves. Indeed, given signs that inflows into emerging market debt may continue, the combination of the factors and continued EM inflows likely bode well for Asia’s hard currency spreads and current valuations going forward.
1 The demand estimate is based on holdings of non-domestic bonds by life insurers, pensions, and sovereign wealth funds.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of August 2025.
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