Asia's Long-End Dollar Bonds: Structural Scarcity and the Yield-Risk Paradox

The issuance of long-end dollar bonds in Asia has entered a new phase of structural scarcity, driven by a confluence of monetary policy divergence, corporate financing strategies, and shifting investor preferences. While the region’s USD bond markets have grown by 18.1% in the first half of 2025, net supply remains negative in key markets like China and Japan, where onshore funding costs outpace offshore alternatives [2]. This scarcity has created a paradox: tighter credit spreads and higher risk-adjusted returns coexist with a shrinking supply of long-duration assets.

Structural Scarcity: A Confluence of Factors

The shift from USD to local currency issuance has been a primary driver of supply constraints. Asian central banks, including the Reserve Bank of India and Bank Indonesia, have cut rates to stimulate growth, making local bonds more attractive for corporates [1]. For instance, India’s local bond market expanded by 25% year-over-year, while Indonesia’s surged by 39% [1]. This trend has reduced the availability of USD-denominated bonds, particularly in China, where net redemptions of $36.5 billion in 2025 have created a vacuum in the market [1].

Japan’s recalibration of its super-long bond issuance further underscores the structural imbalance. With rising yields and concerns over demand for long-duration instruments, Tokyo is considering trimming its supply of 40-year JGBs [4]. Such policy adjustments reflect a broader recalibration of global bond markets, where technical pressures—rather than fiscal sustainability—now dominate decision-making [5].

Yield Implications: Tighter Spreads and Widening Differentials

The scarcity of long-end dollar bonds has pushed credit spreads to historically tight levels. Asian investment-grade credits have tightened by over 30 basis points since April 2025, supported by robust fundamentals and limited exposure to U.S. trade risks [1]. For example, in Q2 2025, the iBoxx ABF Pan-Asia Bond Index (US-dollar unhedged) delivered 6.3% total returns, outperforming U.S. Treasuries, which saw 10-year yields rise to 4.23% [3].

Yield differentials have also widened as Asian real yields outpace U.S. counterparts. In Indonesia, India, and the Philippines, real yields now exceed those in the U.S., attracting income-seeking investors [6]. This dynamic is amplified by the U.S. dollar’s 8.3% decline in 2025, which has made local currency bonds more appealing for foreign investors [4].

Risk-Adjusted Returns: A Superior Proposition

Structural scarcity has enhanced the risk-adjusted returns of Asian dollar bonds. Historically, Asia Pacific investment-grade credits have delivered higher Sharpe ratios than U.S. counterparts across multiple time horizons, driven by lower volatility and strong economic fundamentals [2]. In Q2 2025, Asian investment-grade credits returned 1.22%, while high-yield credits gained 0.83%, reflecting a resilient market [3].

The diversification benefits of Asian bonds are also evident. With low correlations to developed market bonds, these assets have provided a hedge against U.S. fiscal uncertainty and geopolitical risks [5]. For instance, Thai 10-year yields fell 37–45 basis points in Q2 2025, responding more strongly to U.S. Treasury declines than to increases [4].

Investor Behavior: Anchor Demand and Strategic Reallocation

Anchor investors, including Chinese banks and South Korean insurers, have deepened their allocations to USD Asian bonds, reaching multi-year highs [1]. This demand is fueled by the shrinking supply of hard currency bonds and the search for yield amid U.S. rate cuts. Meanwhile, Asian investors are repatriating capital to local markets, where accommodative policies and fiscal discipline offer a stark contrast to U.S. fiscal concerns [6].

The contraction in Asia’s USD credit market—flat net supply year-to-date—has further solidified this trend. With China’s share of regional USD issuance declining from 60% (2017–2021) to 36% in 2025, investors are diversifying into markets like India and South Korea [1].

Conclusion

Asia’s long-end dollar bonds are at a pivotal juncture. Structural supply scarcity, driven by local currency issuance and policy shifts, has created a favorable environment for tighter spreads and superior risk-adjusted returns. As U.S. rate cuts loom and the dollar’s dominance wanes, these bonds offer a compelling alternative for investors seeking diversification and yield. However, the sustainability of this trend will depend on regional economic resilience and the ability of issuers to navigate evolving capital flows.

Source:
[1] Five Factors Supporting Asian Credit Spreads [https://www.pgim.com/content/pgim/sg/en/institutional/insights/asset-class/fixed-income/bond-blog/five-factors-supporting-asian-credit-spreads.html]
[2] Asia Capital Markets Report 2025: Corporate debt markets [https://www.oecd.org/en/publications/asia-capital-markets-report-2025_02172cdc-en/full-report/corporate-debt-markets_7b3ae2b1.html]
[3] Asian Bonds Deliver Strong Returns in Q2 2025 [https://www.abf-paif.com/sg/en/investor/insights/asian-bonds-deliver-strong-returns-in-q2-2025]
[4] Asian Bonds More Sensitive to Treasury Rallies Than Routs [https://www.bloomberg.com/news/articles/2025-05-08/asian-bonds-are-more-sensitive-to-treasury-rallies-than-routs]
[5] Positive macroeconomic drivers for Asia bonds are in play [https://am.lombardodier.com/insights/2025/july/positive-macroeconomic-drivers-for-asia-bonds-are-in-play.html]
[6] Fiscal Deficit Fears Give a Surprising Boost to Asian EM Bonds [https://www.bloomberg.com/news/articles/2025-07-13/fiscal-deficit-fears-give-a-surprising-boost-to-asian-em-bonds]