Lei Zhu, what has fundamentally changed in Asian fixed income?

Over the past two decades, Asia has moved from being primarily a recipient of international capital towards becoming an exporter of capital. The region has accumulated considerable wealth, its bond markets have matured and credit quality has improved across many economies.

We distinguish between two broad markets: hard-currency bonds, principally US dollar-denominated investment-grade and high-yield credit, and local-currency bonds. The latter have expanded considerably. Across both markets, an increasingly important source of demand is Asia’s own investors.

That changes the dynamics. When Asian capital returns to the region, investors often buy high-quality regional bonds before looking elsewhere.

You describe parts of Asian fixed income as an alternative safe haven. What supports that view?

Safe haven is always a relative term. Concerns about US fiscal deficits and sovereign rating downgrades have encouraged investors to look more broadly at where they preserve capital.

There is no single replacement for the traditional safe haven. Instead, investors are building a basket of assets and currencies. Singapore and Australia benefit from their strong sovereign credit quality, while other Asian markets attract different groups of investors.

High-quality Asian dollar credit also benefits. Supply is relatively limited, and strong demand from within the region supports valuations.

Has that resilience been tested in periods of stress?

Yes. We have seen it through trade tensions and more recent geopolitical shocks. Parts of Asian fixed income have held up well relative to other global bond markets.

In some periods of stress, yields in Singapore and Hong Kong have fallen even as yields in major Western markets have risen. To me, that is evidence of investors seeking safety in those markets.

«It is important to look at individual markets, however. Asia is not one uniform asset class.»

It is important to look at individual markets, however. Asia is not one uniform asset class.

Is this a temporary shift in capital flows or a lasting change?

I see it as a structural trend. In a more fragmented global economy, different investors have different ideas about what constitutes a safe haven.

Malaysia is an interesting example. It benefits from supply-chain diversification and investment spilling over from Singapore. It can - as an Islamic country - also appeal to Middle Eastern investors looking for a relatively stable destination outside their own region.

A market does not have to be regarded as a safe haven by everyone to attract significant capital. It needs to meet the requirements of investors who have substantial wealth to allocate.

Why does Singapore stand out?

Singapore has developed from a regional safe haven into a global one. It attracts capital not only from Asia, but also from Europe and North America.

I lived in Singapore for 14 years and previously worked for its largest bank, so I have seen that development first-hand. Its strong credit standing is especially valuable when the number of highly rated sovereign markets is limited.

The demand is also visible in relatively low bond yields. Investors are willing to accept less income in exchange for the qualities they value in the market.

What role does Hong Kong play alongside Singapore?

Hong Kong connects China’s liquidity conditions with US interest rates. Short-term rates are influenced by local liquidity and conditions in mainland China, while longer-term rates are more closely linked to the US.

That can produce an attractive yield curve. Relatively low inflation also makes the level of real interest rates interesting.

«Investors also face a relatively limited supply of high-quality Asian dollar bonds.»

We see money arriving from mainland China, elsewhere in Asia and increasingly from the Middle East and Europe. I view Hong Kong and Singapore as complementary destinations. They attract different flows and both have a place in a diversified basket.

Asian investment-grade credit already trades at tight spreads. Why is demand still strong?

There are structural reasons. Asian credit generally has a shorter duration than comparable US credit, and demand from regional investors is strong.

Investors also face a relatively limited supply of high-quality Asian dollar bonds. The combination of local wealth, demand for defensive assets and limited supply helps explain why spreads can be very tight.

You cannot understand these valuations by looking only at the additional yield over US Treasuries. You also need to consider who is buying and why.

What has changed in Asian high yield since China’s property crisis?

The market looks very different from the period around the 2022 property crisis. Default rates have fallen sharply from the levels reached during that period, and spreads have tightened substantially as the market has recovered.

Investor perceptions have not necessarily adjusted at the same speed. Many still associate Asian high yield with very high default risk.

I believe that gap between perception and the improvement in defaults helps explain why opportunities remain, even after a strong recovery.

What makes Asian bonds relevant to Swiss investors?

Swiss investors are familiar with the idea that a safe haven does not necessarily offer the highest yield. Switzerland itself illustrates that.

Simply chasing yield can be misleading. Sometimes a country has to offer a higher yield because investors demand more compensation for holding its debt. Lower yields elsewhere may reflect demand for stability.

For Swiss investors, selected Asian bond markets offer a way to diversify into other markets they regard as defensive. Low Swiss interest rates also make the income available in parts of Asia relevant. High yield offers a different opportunity from investment-grade and local-currency bonds, so those segments should be considered separately.

Are Swiss investors receptive to that argument?

In my experience, they are relatively open to Asia. Many know Singapore and Hong Kong well, and some have worked there.

«Inexpensive Chinese goods can help contain inflation elsewhere in the region.»

Switzerland also has longstanding connections with Asia’s wealth management industry and has contributed to Singapore’s development as a financial centre. That familiarity helps investors understand the institutions and the way these markets operate.

Which Asian economies are benefiting from tensions between China and the US?

Several Southeast Asian economies benefit as companies diversify manufacturing and supply chains. Chinese businesses are also expanding production across the region.

Many economies are developing a connecting role between China, the US and Europe. Vietnam, for example, benefits from companies adding production capacity outside China.

The AI investment cycle is another source of demand. Taiwan and South Korea benefit from semiconductor production, while Malaysia and Indonesia are attracting investment in data centres. Different economies participate in different parts of that expansion.

You also describe China as a source of liquidity for the region. How does that work?

China has a large pool of savings, low inflation and relatively weak domestic loan demand. That creates scope for capital and financing to move abroad.

The transmission goes beyond portfolio investment. It includes loans, funding for overseas production and access to the renminbi bond market. Companies that can obtain lower-cost financing from China may reduce their overall funding costs.

There is also an effect through trade. Inexpensive Chinese goods can help contain inflation elsewhere in the region. Together, financing and trade links help explain why some Asian economies can maintain interest rates below those in the US.

How far has this broader transition progressed?

I think we are still near the beginning. Asia’s bond markets have grown, but they remain relatively small compared with the global pools of capital seeking diversification.

The region’s own wealth already provides substantial support. As investors reconsider where they want to hold defensive assets, there is room for these markets to develop further.