Asian Credit Market Dynamics - February 2026

Macroeconomic Market Update

In January, the U.S. Treasury market experienced some selling pressure. Market focus was on the legal controversy involving Fed Governor Lisa Cook, the Department of Justice’s investigation into Fed Chair Jerome Powell, and broader concerns about the independence of the Federal Reserve. Meanwhile, better-than-expected U.S. economic data and robust GDP performance pushed U.S. yields higher. Overall, various maturities on the U.S. Treasury yield curve rose by approximately 5–7 basis points, while the spread between the 2-year and 10-year yields widened slightly to 71 basis points. After the FOMC maintained interest rates at 3.50–3.75% in its January meeting, the market still expects two rate cuts of 25 basis points each in 2026. Kevin Warsh has been nominated as the next Federal Reserve Chair. His stance favoring lower short-term rates but reducing the balance sheet further added upward pressure on long-term yields.

In India, the federal budget continued a prudent fiscal consolidation path, with deficit targets for fiscal years 2026 and 2027 remaining at 4.4% and 4.3% of GDP, respectively. Although Goods and Services Tax (GST) revenue assumptions were slightly lowered, improvements in consumption, steady tax performance, and ongoing dividend payments from the Reserve Bank of India to the local government supported the overall fiscal revenue outlook. While subnational deficits remain a market concern, driven by robust economic growth momentum and increased capital expenditures, the overall fiscal gap is expected to narrow continuously.

Credit Strategy and Portfolio Adjustments

Despite a noisy macroeconomic environment, Asian dollar bonds performed steadily in January. Early February saw a trade agreement between India and the U.S., which helped ease tariff concerns. A relatively accommodative global monetary environment and stable credit fundamentals within the region supported the resilience of Asian dollar bonds. During the month, spreads on Asian high-yield (HY) bonds narrowed by 62 basis points, while spreads on Asian investment-grade (IG) bonds remained largely unchanged.

We expect the market to assess any changes in the probability of rate cuts in the second half of 2026 based on Warsh’s future policy statements. At this stage, our base case remains that the Fed will maintain a dovish stance amid easing inflation and a cooling job market. However, with three rate cuts already accumulated in 2025, the threshold for further easing has risen given the continued resilience of the economy. This environment could keep short-end yields relatively high in the near term, creating opportunities to lock in attractive coupon returns. Meanwhile, uncertainties driven by the trajectory of balance sheet policies and the 'de-dollarization' theme may lead the market to demand higher risk premiums, providing more room for trading strategies. Overall, we maintain a slightly underweight duration stance and remain cautious about upside risks to US Treasury yields.

We believe AI-related capital expenditures and large corporate bond issuances pose limited risks to Asian investment-grade bonds, with spreads continuing to react mildly. Oracle and Alphabet have successively launched large-scale debt issuance plans, meeting investor demand with attractive blended yields.

In the high-yield space, overall market sentiment remains positive, and limited new bond supply is supporting refinancing opportunities for Asian corporates. We continue to focus on issuers who have successfully completed refinancing, as their credit quality has improved further. The decline in domestic interest rates in China is also providing companies with more diversified financing channels. Additionally, Indian credit issuers are increasingly favoring domestic refinancing, which, while improving local market technicals, has also tightened valuations. Moody's downgrade of Indonesia's outlook from 'stable' to 'negative' primarily reflects concerns over the effectiveness of local policy implementation rather than deterioration in corporate fundamentals. In fact, we prefer high-yield corporate bonds in Indonesia, as we expect the short-term technical backdrop for sovereign and quasi-sovereign issuers to remain weak.

Read detailed analysis:Value Partners | Asian Credit Market Monthly - February 2026

$VALUE PARTNERS (00806.HK)$$Value Partners Asian Income Fund (HK0000352291.MF)$$Value Partners Greater China High Yield Income Fund MDis (KYG9319N1337.MF)$

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