Asia bonds look vulnerable as Fed rate cuts deliver less support

[SINGAPORE] Emerging Asian bonds are set to become less attractive as central bankers near the end of their easing cycles, with widely anticipated US Federal Reserve cuts offering little reprieve for the region this year.

Global funds already have reason to head elsewhere as the current spreads on emerging Asian debt over US Treasuries are below their historical averages, suggesting they are expensive. Regional policymakers have largely front-loaded rate cuts, trimming their benchmarks by about three times as much as the Fed since the start of 2025.

“One prominent headwind to emerging-market performance relates to the diminished valuations appeal of local assets” due to reasons such as lower nominal bond yields, Societe Generale strategists, including Phoenix Kalen and Kiyong Seong, wrote in a research note last week.

Emerging Asian bonds have returned just 4.1 per cent this year, versus 5.5 per cent for Treasuries and 7.1 per cent for developing-nation debt as a whole, according to Bloomberg indexes.

Central banks in Indonesia, India, Malaysia, Thailand, South Korea and the Philippines have trimmed their benchmark rates by a cumulative 450 basis points so far in 2025. That works out to an average of 75 basis points each, versus just 25 basis points for the Fed.

The situation was a lot different when US policymakers began their current easing cycle back in September 2024. At that time, the prospect of Fed rate cuts was seen as opening the door for more easing from its Asian counterparts.

Yields on 10-year bonds from eight Asian economies climbed by an average six basis points in September as the Fed made its first rate cut this year. When the US central bank began to ease in September 2024 with a 50 basis-point move, emerging Asian yields fell by an average of 13 basis points.

Narrower spreads

Thailand’s 10-year yield is around 270 basis points lower than that of similar-maturity Treasuries, which is 1.7 standard deviations below its three-year average. The same gauge for all other Asian peers is also negative, meaning current spreads are below historical levels.

Asian bonds also stand to gain less from any further rally in Treasuries. The average 30-day correlation between yields on US 10-year notes and similar-maturity emerging-Asian bonds is around 0.05. That compares with 0.15 for debt from Eastern Europe, Middle East and Africa, and 0.41 for securities from Latin America. A value of one would mean the securities move in lockstep.

With US rate expectations largely priced in over the next six months, the “focus is now shifting to domestic fundamentals”, said Rajeev De Mello, global macro portfolio manager at Gama Asset Management. Investors are likely to reward economies with “coherent and credible policy frameworks”, he said. BLOOMBERG