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Below the Quote on Asia: Most central banks have moderately hawkish bias except for China By Magdalene Teo, Fixed Income Analyst Asia, Julius Baer

While Asian central banks are cautious on energy-driven CPI pressures, most are prioritising a balance between growth and macroeconomic stability rather than aggressive tightening. Fiscal measures are helping some countries cushion the impact of high energy costs on households and businesses. We see a moderate hawkish bias for most central banks except China. While Asian HG credit spreads have widened, they remain tight and below long-term averages, reflecting resilience and Asia’s macroeconomic stability and fiscal strength. Investors can lock in attractive carry before the Fed starts easing. We prefer a cautious and selective approach to Asian HY, as weak technicals may continue to tighten funding conditions. 

Artificial intelligence (AI) continues to drive exports for North Asian countries, providing some reprieve for industries suffering from a strong USD, high borrowing costs, and elevated oil prices. Bond markets in South Korea* and Japan are pricing in a hawkish monetary policy, as CPI remains above central banks’ targets. In Japan, upgraded economic assessment and JPY undervaluation support the case for further tightening. China remains an outlier, with further measures to support credit and growth. While Asian credit markets have slowed amid geopolitical uncertainty, corporate fundamentals remain healthy, in part due to an active primary market in H1 2026. In South Asia, the Reserve Bank of India delivered its first rate hike in nearly four years and shifted its policy stance to calibrated tightening due to inflation and the weakening INR. Following 100bp of policy tightening this year, Bank Indonesia is adopting a more measured approach, balancing IDR and financial stability with continued support for economic growth as it monitors the US Federal Reserve’s (Fed) next policy steps. Thailand’s positively sloped yield curve reflects a combination of subdued policy rate expectations as it sees higher inflation to be transitory and modest term premia linked to inflation and fiscal considerations at longer maturities. The Bank of Thailand remains focused on supporting below-potential growth amid high household debt, small- and medium-sized enterprise weakness, softer tourism, and flood related headwinds. Overall, Asia faces a more challenging economic backdrop, as higher oil prices and rising global yields tighten external financial conditions. Yet the region is entering this period from a position of relative strength, supported by generally healthy external balances, resilient corporate fundamentals, and credible frameworks. While most central banks are cautious towards energy-driven CPI risks, most continue to prioritise a balance between growth and macroeconomic stability. Fiscal measures are helping some countries cushion the impact of elevated energy costs on households and businesses. In the Asian credit segment, while it has not been immune to the global sell-off in bonds, the three-year-average credit spread reflects relative resilience and the region’s relative macroeconomic stability and fiscal strength. With Asia’s high-grade (HG) credit spread at 61bp and an elevated US Treasury yield, investors can lock in attractive carry before the Fed starts easing. We adopt a more selective strategy for Asian high yield (HY), as financial conditions could tighten further from here. Notably, Asian EM local-currency sovereign bond yields have risen month-to-date (as high as 31bp for Philippines and 18bp for India). In terms of Asian FX, the JPY, IDR, THB, and PHP have underperformed North Asian currencies month-to-date, as higher oil prices worsened the terms of trade and higher US yields reduce carry attractiveness.  

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