Why have Asian bond yields remained stable or declined, while those in the US and Europe risen? 

Part of the initial market reaction was technical and short term. The magnitude of the global sell-off drove investors to seek liquidity, primarily in US Treasuries and German bunds. However, structural factors were also at play and arguably far more relevant.

Take diverging macroeconomic risks. Inflation across much of Asia is at or below target levels and is likely to ease further as global growth headwinds weigh on trade. Additionally, softening domestic consumption will force inflation down. As a major importer of energy products, Asia benefits significantly from declining oil prices and other commodities. If anything, deflation is the bigger challenge for some nations.

In contrast, the US faces growth risks, while tariffs and new port fees are set to drive up inflation. The US Federal Reserve (Fed) has made clear it can no longer assume stable and declining inflation. Erratic policymaking is further complicating the outlook. Stagflation is now a real possibility.  

Europe, meanwhile, has shifted towards more aggressive fiscal policy to counter trade headwinds and bolster defence spending. Countries will need to fund this expansionary fiscal policy through debt issuance, posing supply risks for European bonds.

What factors in the US should Asian investors look out for?

Trump’s tariffs have partly eroded the US’s credibility and the ‘safe haven’ status of Treasuries. Large sovereign wealth funds, international institutional investors and Asian central banks are questioning their high exposure to US Treasuries. The unpredictable nature of policymaking and the current geopolitical backdrop mean US exposures entail far greater risk than before. 

Some US politicians have even discussed the unthinkable: selectively defaulting on Treasuries held by China. Recently, Stephan Miran, Chairman of the Council of Economic affairs, proposed charging holders of US debt a “safekeeping” fee to discourage foreign holdings, which is seen as a liability. The move is also an attempt to weaken the dollar to regain trade competitiveness. Both measures would be tantamount to default and could lead to further ratings downgrades.

The independence of the Fed has come into question. President Trump had openly called for the sacking of the Fed Chairman, Jerome Powell, though he later backtracked. Any hint of a weakening the Fed’s autonomy could undermine its ability to set prudent policy and effectively target inflation. 

Is this US fallout a temporary trend or something more structural?

International investors have made their feelings clear in the short term. China and Japan are reducing their exposure to US Treasuries. Whether this is a temporary trend or a structural shift depends on definitions and investment horizons. What is clear is that the current political environment and unpredictable decision-making process will likely persist for the next few years. US election results will then determine if this becomes the new normal. In that event, Asian investors would reassess their long-term risk and desire to hold US debt.  

Recently, large Asian central banks have diversified into local currency markets for the first time. This utilisation of regional markets could become a structural feature. 
This brings us to the globalisation of Asian bonds. Over the last couple of decades, regional fixed income markets have grown in depth, liquidity, size and rating quality. This transformation has enabled more regional markets to join key global bond indices. India recently became part of the JP Morgan Government Bond Index - Emerging Markets, while South Korea is poised to join the FTSE World Government Bond Index. These factors provide structural support for Asian bonds.

What role do fiscal policies play in shaping bond yields and term premia in the Asia and how does that compare to the West?

Over the last few years, fiscal policy and debt sustainability have shaped Asia. Policies have generally been fiscally prudent, diverging from major developed markets and non-Asia emerging markets (EM). Consider COVID. Many Asia nations provided support from a position of fiscal surplus. At the same time, recessions and falling fiscal revenues wreaked havoc in broader EM economies. Western nations amassed huge debts to manage the crisis.  

In the West, unfavourable demographics, social spending and unfunded social security systems are a key issue. Defence spending and the need to upgrade aging infrastructure will exert additional fiscal pressures. Asia also faces challenges with aging populations, which will increase the need for pension, health and welfare programs, although it tackles these from a stronger fiscal position.  

The US fiscal deficit was 6.7% of GDP in 2024 [1]. Public debt is expected to rise to nearly 170% of GDP [1] by the middle of the century. Debt is also highly politicised, with markets frequently navigating last-minute, contentious debt ceiling negotiations. 

In the absence of quantitative easing in the US, higher bond supply amidst weakening confidence will likely exert upward pressure on yields and term premia. This will be amplified if policy affects credibility and fundamentals, potentially leading to sovereign ratings downgrades. 

Europe requires expansionary fiscal policy, which brings various risks. Italy faces significant debt sustainability concerns, followed by France. Political risks, including the rise of the far right, and unfavourable demographics will increasingly weigh on several European economies. In the UK, fiscal policy missteps helped push longer-dated gilt yields to a near 30-year high. 

Asian countries have faced manageable and relatively muted pressures. South Korea, for example, expanded its bond supply to support growth. Demand, however, was high. It has a consolidated debt of less than 2% and it a debt-to-GDP ratio of 55% [2]. The prospect of South Korean bonds listing on the FTSE Global Bond Index also spurred additional interest [3].   

Singapore runs a fiscal surplus, while fiscal deficits in Taiwan and Hong Kong are also low, at less than 2% [4]. In recent years, many countries have pursued fiscal consolidation and lower debt-to-GDP ratios, providing fiscal headroom. Notable examples include Indonesia (40%) [5], Thailand (60%) [5], Malaysia (70%) [5]and India (80%) [5], with external debt-to-GDP [6] also quite low. Strong fiscal health also limits bond supply and reduces vulnerability to global shocks via exchange rate risk. 

Domestic demand for Asian debt is growing, as financial sectors and insurance companies seek to match maturity liabilities. Demand/supply conditions in Asia have helped anchor yield curves and minimise volatility, excluding some frontier economies. These factors ensure term premia are generally lower than broader EM and lower and/or more stable than in developed markets. 

Final thoughts…

President Trump's tariff policies have unleashed global volatility. Yet, Asian bonds have remained resilient, driven by strong fiscal health, growing domestic demand and structural market transformation. Amid market turbulence and shifting geopolitical dynamics, the region's bonds offer stability, diversification, and opportunities that are hard to ignore. For investors seeking assets that can weather the storm, Asian bonds are a clear contender.