Asian Dollar Credit Incurs Worst Losses in Five Years on Tariffs

The Asian dollar credit market faced its most severe turbulence in five years in early 2025, driven by escalating U.S. tariffs that triggered a perfect storm of volatility, sectoral fragmentation, and investor flight to safety. With tariffs on Chinese imports surging to 125% and broader trade restrictions stifling regional trade flows, credit spreads widened sharply while central banks scrambled to offset growth risks.

Tariff Escalation: The Trigger for Market Chaos

The U.S. administration’s aggressive use of tariffs as a geopolitical tool ignited the crisis. Key measures included:
- China: A 125% tariff on all imports from China (including Hong Kong and Macau) by April 12, 2025, reciprocated by Beijing’s own 125% levies.
- Steel/Aluminum: A 25% tariff on imports from Asia, including Japan, South Korea, and Taiwan, under Section 232.
- Automobiles: 25% tariffs on non-USMCA-compliant vehicles and parts, effective April and May 2025.
- Baseline Tariffs: A 10% levy on all Asian exports (excluding China) delayed until July 9, 2025.

These measures, compounded by non-tariff barriers like export restrictions on rare earths, disrupted global supply chains and dampened growth outlooks.

Market Impact: HY Credits Bear the Brunt

The fallout was most severe in high-yield (HY) bonds, which saw spreads widen by 13 basis points (bps) in January 2025 alone. Key dynamics included:
- Hong Kong Property Sector: A major developer’s liquidity crisis and restructuring fears triggered a sell-off, dragging down regional HY performance.
- China: Spreads widened on property and banking credits amid fears of a growth slowdown.
- Malaysia/Thailand: Trade-exposed sectors faced margin pressure as export-dependent economies grappled with demand shocks.

In contrast, investment-grade (IG) credits outperformed, with spreads narrowing 1.2 bps as investors sought safety. The Markit iBoxx Asian IG Index returned 0.52% in January, while HY credits limped to 0.08%.

Regional Disparities: Winners and Losers

The tariffs exacerbated regional divides:
- India: Positioned as a "relative safe haven," with spreads tightening on strong domestic demand and limited U.S. export exposure. The Adani Group’s resilience and infrastructure projects buoyed investor confidence.
- Indonesia/Philippines: Central bank rate cuts (Indonesia’s rate dropped to 5.75%) and fiscal discipline supported local bonds, with carry trades favoring these markets.
- Vietnam: Exposed to a potential 25% tariff on all exports, spreads widened despite its role as a beneficiary of China+1 manufacturing shifts.

Central Banks Pivot to Growth Support

Asian central banks countered tariff-driven headwinds with accommodative policies:
- Singapore: Flattened its exchange rate band for the first time since 2020, signaling easing to shield growth.
- Indonesia: Cut rates by 25 bps, prioritizing economic stability over inflation concerns.
- Malaysia/South Korea: Maintained rates but hinted at future cuts if trade risks persist.

Meanwhile, the U.S. Federal Reserve paused rate hikes in January, with markets pricing in 100 bps of cuts by year-end. This dovish shift, driven by tariff-induced stagflation fears, provided a tailwind for Asian bonds by reducing global yield pressures.

Outlook: Volatility Amid Structural Opportunities

While near-term risks remain, structural factors could stabilize markets:
1. Lower U.S. Treasury Yields: The Fed’s easing trajectory supports Asian IG bonds, with 10-year UST yields dropping to 3.99% in January.
2. Investor Reallocation: Asian HY’s higher yields (vs. global peers) and declining default rates (as China’s property sector shrinks) may attract yield-seeking capital.
3. Diversification Demand: Asian credits offer a "strong global diversifier" amid U.S. trade policy uncertainty, with sectors like Indian renewables and Indonesian infrastructure poised for gains.

Conclusion: Navigating the Tariff Crossroads

The 2025 tariff war has reshaped Asian credit markets, creating both risks and opportunities. HY credits face lingering sector-specific challenges, particularly in property and trade-exposed industries. However, IG bonds and select high-carry issuers (e.g., Indonesia, the Philippines) offer resilience amid accommodative policies and lower global yields.

Investors must prioritize active credit selection, favoring sectors insulated from trade shocks (e.g., toll roads, utilities) and countries with strong fiscal buffers. While tariff-driven volatility will persist, Asia’s structural growth drivers—domestic consumption, intra-regional trade, and leadership in green tech—position its credits for a rebound once policy uncertainty abates.

The path forward hinges on geopolitical de-escalation and central bank agility. For now, Asian dollar bonds remain a test of investors’ patience—and their capacity to distinguish signal from noise in a fractured global economy.