Asian Credit Market Monthly Report – May 2026

Macroeconomic Market Update

In April, the U.S. macroeconomic environment reflected a cautious yet divergent market sentiment. U.S. Treasury yields rose further amid persistently elevated energy prices, and the yield curve modestly exhibited a bear flattening pattern. The yields on 2-year and 10-year U.S. Treasuries climbed to 3.87% and 4.37%, respectively, narrowing the 2s10s spread to approximately 50 basis points. At its April FOMC meeting, the Federal Reserve held rates steady at 3.50%–3.75%, but unusually significant internal dissent emerged—three members leaned hawkish while one leaned dovish—highlighting growing uncertainty over the future policy path and reinforcing market expectations of a 'higher-for-longer' interest rate regime.

Inflation dynamics remained mixed. The headline Consumer Price Index (CPI) rebounded sharply, driven by a surge in gasoline prices, while core inflation remained relatively contained, although shelter costs continued to show slightly elevated momentum. Meanwhile, labor market signals also diverged: nonfarm payroll additions remained robust, but prior-month figures were revised downward, and the labor force participation rate declined—indicating that while the U.S. economy remains broadly resilient, growth momentum is beginning to show signs of imbalance.

Credit Strategy and Portfolio Adjustments

The Asian credit market rebounded in April from the credit spread widening and negative returns seen in March, with both investment-grade (IG) and high-yield (HY) bonds delivering notable recoveries. Compared to end-March levels, U.S. Treasury yields moved little overall, but Asian credit spreads generally narrowed. IG and HY spreads tightened by 11 and 73 basis points, respectively, primarily supported by improved risk sentiment and the market largely recouping most of March’s losses following the two-week ceasefire agreement between the U.S. and Iran early in the month.

Within Asian investment-grade bonds, BBB-rated securities led performance, with spreads tightening by 13 basis points. This was driven by higher-beta sovereign debt—particularly from Indonesia and the Philippines—as well as select quasi-sovereign and corporate bonds. In contrast, AA- and A-rated bonds saw more modest spread compression, reflecting investors’ post-March correction rotation back into higher-beta BBB-rated paper.

In the new issue market, year-to-date issuance of Asian U.S. dollar-denominated bonds totaled approximately $101 billion, down 8% year-over-year. Excluding Japan, Asia and Australia recorded year-over-year declines of 22% and 26%, respectively, with new supply volumes of $48 billion and $16 billion. Japanese issuance, however, surged by 43% to $37 billion, partially offsetting the regional decline. Overall, the Asian U.S. dollar credit market has maintained negative net supply year-to-date, which is expected to continue providing technical support to bond prices.

Looking ahead, we expect markets to continue revolving around the theme of 'higher rates for longer,' reflecting heightened uncertainty regarding inflation outlook and stagflation risks. Given the anticipated increase in interest rate volatility, we will maintain a relatively cautious investment stance and a modest underweight in duration.

Asian high-yield bonds posted a broad-based rebound in April, led by B-rated securities—a pattern consistent with typical risk-on market behavior. Notably, bonds from Macau and frontier-market sovereigns (particularly Sri Lanka and Pakistan) registered significant gains, driving further narrowing of overall credit spreads. Total returns in these markets have now largely recovered to levels seen before the U.S.-Iran conflict.

Read detailed analysis:May 2026 Asia Credit Market Monthly Report

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Source: Value Partners, Bloomberg, MSCI, as of April 30, 2026.

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