Executive Summary
- Vast majority of Asia Pacific USD bond issuers are relatively insulated from US tariffs due to their domestic focus
- The uncertain outlook calls for dexterity in sector/issuer selection and portfolio positioning
- We advocate a more defensive stance and prefer investment grade and selected strong high yield credits
Like other asset classes, the Asian bond market has endured meaningful volatility since the announced Liberation Day tariffs. As a reference, the Z-spread of the investment grade (IG) part of the JP Morgan Asian Credit Index has widened by around 30bps since 2 April 2025. While the swift pricing reaction is understandable, nimble and careful sector and issuer selections will enable investors to navigate through the uncertainty.
Fig 1: Asian investment grade spreads widened sharply
Source: Bloomberg, JP Morgan Asia Credit Index IG as at 7 April 2025
Asian credits started the year strong
Asian credits began the year with sound financial positions; the average leverage1 of Asian IG issuers (excluding Chinese real estate) was estimated to be a healthy ratio of 1.1x. IG issuers have also maintained healthy liquidity, helped by manageable debt maturity profiles and supportive funding markets.
We expect the vast majority of Asia-Pacific (APAC) USD bond issuers to be relatively insulated from the risk of direct tariff impositions by the US, given their domestically focused business profiles. However, the second-order impact from an uncertain economic outlook could pose a challenge.
Sizing up the tariff impact
A small number of APAC bond issuers – especially in the car, steel and aluminium industries – are already subject to tariff impositions by the US but these make up a small percentage of the region’s bond markets. As of 31 March 2025, the metals/mining (which include steel and aluminium issuers) and automotive sectors made up around 4.3% of the JP Morgan Asia Pacific Credit Index which includes Japan and Australia.
Fig 2: Sector breakdown of the JACI Asia Pacific index
Source: JP Morgan, 31 March 2025
The impending trade uncertainty is more likely to have second-order impact on the macroeconomic outlook of the region. This will occur through weaker economic demand, investment activities and personal consumption. Trade-dependent economies are more likely to feel the brunt of slower economic activities. For selected economies, foreign currency pressures could also affect the credit outlook of issuers, to the extent that there are material foreign currency mismatches.
Potential winners and losers
The tariff situation remains fluid with various economies posturing for remedial or retaliatory actions against the US. Investors need to understand the specific impact on different sectors and the altered trade dynamics. The uncertain outlook calls for dexterity in sector/issuer selection and portfolio positioning. On the whole, it is not all bad news for Asia-Pacific credits. We advocate a more defensive stance and prefer investment grade and selected strong high yield credits.
Sector wise, we prefer those that benefit from domestic consumption such as utilities, infrastructure, non-discretionary retail, as well as government-linked entities that enjoy strong support and are less susceptible to tariff or macroeconomic-induced uncertainties. We expect these sectors to enjoy more resilient funding access given their defensive credit profile.
Fig 3: Assessment of tariff impact on sectors
In general, we prefer investment grade issuers given their stronger financial and liquidity positions. In the high-yield space, we are more selective and will wait for the right opportunities should there be further pricing volatility.
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1 Leverage defined as Net debt/EBITDA estimated by JP Morgan as of 2024
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