U.S.-China tensions escalated this week due to both countries’ implementation of tariffs. Despite tariffs, Nikko Asset Management believes in a strong outlook for Asian bonds this year based on strong fundamentals, monetary easing, and supportive policies.
Nikko Asset Management’s Asian Fixed Income Team recently provided an outlook on the 2025 Asian bond market. As inflation eased, most regional banks cut rates in the second half of 2024. Demand grew in Asian ex-China countries and is expected to remain supportive this year.
“Meanwhile, US-China tensions have been reshaping global supply chains as multinational firms adopt ‘China plus one’ strategies to mitigate the impact of tariffs and reduce dependence on Chinese manufacturing,” the authors explained. “This shift is expected to continue after Donald Trump becomes US president, thereby bolstering foreign direct investment (FDI) into the region and supporting overall growth.”
Local Asian bonds will likely perform strongly this year due to ongoing central bank easing. U.S. tariffs could also create opportunities in bond markets. Should the strong dollar weigh on local currencies, the authors anticipate “strong fundamentals” to lessen impacts on Asian bonds. They also noted that in the last two years, Asian currencies and bonds proved less volatile compared to other regions.
The 2025 Asia Credit Market
“We expect Asia credit fundamentals to stay resilient in 2025,” the Nikko Asian Fixed Income Team predicted. They anticipate spreads remaining rangebound this year, with carry generating much of the returns this year.
The majority of Asian banks and business came into the new year with solid balance sheets and the ability to buffer rates. In addition, the removal of the lowest-performing Asian high-yield securities creates a backdrop for significantly lower default rates this year.
“We expect to see higher gross supply in the Asia credit space in 2025 relative to the past two years, as the decline in US yields reduces the funding cost gap between offshore and onshore debt,” the authors wrote. “At the same time, we expect demand from regional investors to stay firm given the still-high all-in yield.”
Capture Asian High-Yield Bonds With KHYB
The KraneShares Asia Pacific High Income USD Bond ETF (KHYB ) is an actively managed fund that invests in USD-denominated high-yield debt securities from companies in Asia, excluding Japan. The fund is poised to capture ongoing recovery and growth within the Asia bond market.
As of February 4, 2025, KHYB offers a 12-month distribution rate of 10.23% and a 30-day SEC yield of 7.40%. The distribution rate annualizes the most recent fund distribution and is divided by the fund’s NAV at the time of distribution.
The fund is benchmarked to the JPMorgan Asia Credit Index (JACI) Non-Investment Grade Corporate Index. KHYB invests in high yield fixed income securities, or “junk bonds.” These bonds rate below the four highest categories (Ba1/BB+ or lower) by at least one credit rating agency. If unrated, the subadvisor seeks those of similar quality. Notably, high-yield corporate bonds in Asia historically default less than their peers. They also carry a lower duration on average.
Nikko, the sub-advisor, creates the portfolio using top-down macro research and bottom-up credit research. They also utilize a proprietary process that combines qualitative and quantitative factors to value an issuer’s credit profile.
By moving the credit curve up, KHYB will be more defensive against the benchmark and have shorter-duration bonds than the index. When the bonds mature, Nikko decides how and when it wants to redeploy and invest in new bonds. It makes these decisions dependent upon market conditions.
KHYB carries an expense ratio of 0.69%.
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