April 2026 Asia Credit Market Monthly Report

Macroeconomic Market Update

Following the outbreak of the US-Iran conflict at the end of February, the US Treasury yield curve experienced a bear-flattening trend in March, characterized by a sharp rise in short-term yields and a narrowing gap with long-term yields. This was primarily driven by a significant shift in global monetary policy expectations due to a surge in energy prices and renewed inflation concerns. The US 10-year Treasury yield once rose to 4.43% mid-month, while the spread between 2-year and 10-year yields narrowed to 52.4 basis points by the end of March. Rising tensions in the Middle East disrupted global energy supplies, pushing Brent crude oil prices above $118 per barrel, while also prompting the market to raise expectations for future commodity prices.

Although overall US economic activity data remained resilient, with the ISM index staying in the expansion zone and the labor market remaining tight, consumer-related indicators showed signs of weakening. The Federal Reserve kept interest rates unchanged in the range of 3.5% to 3.75%, while the dot plot indicated that authorities expect to cut interest rates once each in 2026 and 2027, along with an improved economic outlook for 2026. Overall, inflation concerns have again driven market expectations that 'interest rates will remain higher for longer.' Despite the continued risk of upward pressure on oil prices due to the blockade of the Strait of Hormuz, ceasefire negotiations starting in mid-April have provided some support to market sentiment.

Credit Strategy and Portfolio Adjustments

In March, the Asian credit market weakened further against the backdrop of heightened geopolitical risks, volatile global interest rates driven by rising energy prices, and a general decline in risk sentiment. Credit spreads for Asian investment-grade (IG) and high-yield (HY) bonds widened by 12 and 80 basis points respectively, with high-beta and longer-duration bonds underperforming. As the US and Iran resumed ceasefire talks, these credit spreads partially narrowed; since early April, spreads on Asian investment-grade bonds have tightened by about 5 basis points.

Asian investment-grade bonds came under pressure in March due to macroeconomic and geopolitical-driven market volatility, with widening spreads concentrated mainly in BBB-rated credits, particularly issuers highly dependent on energy imports, including markets such as Indonesia, the Philippines, India, and South Korea. In contrast, Chinese investment-grade bonds saw relatively modest tightening in credit spreads, supported by strong local institutional demand and lower sensitivity to global energy supply disruptions.

Overall, the Federal Reserve does not see immediate pressure to cut interest rates, partly because the US labor market remains resilient with no clear signs of weakening, and partly because even if geopolitical risks ease or the US and Iran reach a final ceasefire agreement, production cost pressures across the economy are unlikely to dissipate in the short term. Therefore, we expect that even if a ceasefire is reached, oil prices are unlikely to fall significantly. Historical experience shows that every 10% increase in oil prices typically raises overall inflation by about 0.35 percentage points over the following three months. Over the coming months, market expectations on interest rates may fluctuate within a range of 'limited rate cuts or at most one rate cut,' reflecting uncertainties such as whether inflation is temporary and the risk of stagflation. Against this backdrop, we maintain a slightly underweight duration strategy for bonds.

The Asian high-yield bond market weakened significantly in March due to its higher beta characteristics. Sovereign bonds from frontier markets performed particularly poorly, with Sri Lanka and Pakistan experiencing larger declines. Bonds related to Mongolia's financial and mining sectors also underperformed. However, these segments have since recovered approximately 70% to 80% of their losses. Overall, we remain cautious and favor a defensive stance towards the relevant markets, continuing to prefer issuers with robust balance sheets and strong financing capabilities while avoiding issuers with lower liquidity.

Read detailed analysis:Value Partners | April 2026 Asian Credit Market Monthly Report

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Source: Value Partners, Bloomberg, MSCI, as of March 31, 2026.

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