Asian Credit Market Dynamics - January 2026

Macroeconomic Market Update

The Federal Open Market Committee (FOMC) announced a 25-basis-point interest rate cut to 3.5% – 3.75% with a divided vote of 9 to 3, reflecting growing concerns about the weakening labor market while inflation remains sticky. The Federal Reserve’s latest economic forecast shows a relatively optimistic outlook, expecting U.S. economic growth to accelerate to 2.3% in 2026, with unemployment remaining at 4.4% and core PCE inflation falling back to 2.5%. The U.S. Treasury yield curve has steepened noticeably, with the spread between 2-year and 10-year Treasury yields widening to 69 basis points by the end of December 2025 (from 56 basis points at the end of November and an average of 47 basis points in 2025). The U.S. dollar also weakened during this period. Weak economic data—including slowing non-farm employment growth and easing inflation—further solidified market expectations for continued accommodative monetary policy, supporting short-term bond performance. Meanwhile, long-term bond performance remains constrained by concerns over U.S. government finances and inflationary pressures.

At the start of January, signs of further weakness emerged in the U.S. labor market, with the latest non-farm payrolls increasing by only 50,000. However, the unemployment rate fell to 4.4% in December from 4.6% in November (the highest level since September 2021), indicating that the economy still retains some resilience and reducing the urgency for aggressive rate cuts in the near term. Subsequently, the yield curve flattened again, with the spread between 2-year and 10-year yields narrowing to around 61 basis points. Meanwhile, China's annual Central Economic Work Conference signaled continued loose policies, albeit with a more restrained tone compared to 2024, suggesting that while policy will remain accommodative, the Chinese government is less willing to introduce large-scale, comprehensive stimulus measures.

Credit Strategy and Portfolio Adjustments

Asian dollar bonds performed strongly in 2025, benefiting from easing trade tensions, a more accommodative global monetary policy environment, and robust credit fundamentals. During the year, Asian investment-grade (IG) bond credit spreads narrowed by 23 basis points, while Asian high-yield (HY) bond spreads narrowed by 173 basis points. Looking ahead to 2026, supported by ongoing U.S. rate cuts and relatively stable economic growth prospects in Asia, we expect credit spreads to remain resilient; a moderate easing cycle should continue to support demand for income-generating assets.

We previously anticipated that after completing three rate cuts in 2025, the Federal Reserve may pause briefly at the beginning of 2026, as the threshold for further rate cuts has become relatively higher given the resilience of the economy. If the Fed indeed pauses its rate-cutting pace, there could be a mild increase in short-term bond yields in the near term, giving investors an opportunity to lock in higher yields. We maintain our preference for the middle segment of the yield curve as a core allocation while selectively paying attention to opportunities in long-term bonds; however, the latter remains constrained by uncertainties regarding the Fed’s independence, U.S. fiscal conditions, and local inflation outlook.

Factors such as the transition of the Federal Reserve Chair and the uncertainty surrounding the pace of rate cuts are expected to bring volatility to the market. We assume that the stance of the new chair will not be more hawkish than Powell's, and the market has already priced in about 47 basis points of rate cut expectations. Against the backdrop of moderating inflation and weakening labor market momentum, these expectations appear reasonable overall.

Looking ahead to 2026, U.S. economic growth is expected to be primarily driven by fiscal stimulus and artificial intelligence-related investments. However, the market's expectations for a significant short-term boost in productivity due to AI may be overly optimistic. If corporate earnings fail to meet expectations, market volatility risks could rise. Additionally, we anticipate that new debt supply from hyperscalers in 2026 will be substantial, potentially impacting the technical aspects of the U.S. investment-grade bond market. Nevertheless, given the generally robust balance sheets of large U.S. technology companies, they are likely to have considerable buffer capacity before leverage rises significantly enough to materially affect credit fundamentals. Thus, we expect the spillover impact on Asian investment-grade bonds to be limited.

For Asian high-yield bonds, selecting credit quality remains crucial. We expect the fundamentals of Asian high-yield companies to remain stable or gradually improve, mainly benefiting from steady economic growth and reduced refinancing risks. Coupled with the ongoing diversification of Asian high-yield bonds across industries, these factors are expected to provide support for valuations.

Read detailed analysis:Value Partners | Asian Credit Market Dynamics - January 2026

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