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For decades, the U.S. dollar bond market has been the undisputed first choice for global issuers due to ease of access for global investors, scale of funding and underlying liquidity. However, growing uncertainties in the U.S. fiscal landscape are challenging the Treasury market’s status as the world’s primary safe-haven asset. As we move through 2025, there are certainly some powerful tailwinds gathering behind Asian local currency fixed income. A growing number of both issuers and investors are now recognizing the compelling stability and relative value offered within Asia’s increasingly vibrant bond markets.

Some market perspectives are also evolving beyond the traditional “Asia ex-Japan” perspective, with discussions expanding to include the local currency bond markets of Australia and Japan to create a more comprehensive Asia-Pacific focus. By including the large, liquid and high quality government bond markets of Japan and Australia, this broader Asia-Pacific scope may enhance overall diversification and credit quality.

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Source: S&P Dow Jones Indices LLC. Data as of June 30, 2025. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Year-to-date (as of June 30, 2025), the performance of U.S. Treasuries (up 3.77%, as represented by the iBoxx $ Treasuries) has lagged our flagship Asian local currency indices (see Exhibit 1). The iBoxx Asian Bond Fund (ABF) Pan-Asia (USD Unhedged), made up of sovereign and quasi-sovereign bonds from eight Asian local markets,¹ was up 8.13% YTD, while the iBoxx Asian Local Bond Index (ALBI) (USD Unhedged), made up predominantly of sovereign and quasi-sovereign bonds (approximately 95%) from 10 Asian markets,² gained 7.66%. For the same period, both the Australian and Japanese bond markets, represented by the S&P/ASX iBoxx Australian & State Governments Index (USD Unhedged) and iBoxx Global Government Japan (USD Unhedged), also outperformed U.S. Treasuries, gaining 9.60% and 6.40%, respectively.

Performance from a Diversification Perspective

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Over the past 10 years, Asia-Pacific local currency bond indices have shown only a low-to-moderate correlation to U.S. Treasuries, demonstrating their diversification characteristics (see Exhibit 2). The iBoxx ALBI and iBoxx ABF Pan-Asia indices both had a correlation of approximately 0.50 against the iBoxx $ Treasuries, while the relationship was even weaker for Australian (0.45) and Japanese (0.43) government bonds.

A Look from the FX Angle

With the development of Asian (and Asia-Pacific) markets in recent years, the region is no longer being seen as simply an emerging market allocation, with its growing complexity and diverse performance profiles coming into focus.

For global investors, total return is driven not just by yield, but also by capital gains from bond price appreciation. Crucially, the added exposure to foreign exchange (FX) when investing in Asia-Pacific local markets, in favorable market conditions, may serve as a potent source of excess returns.

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Exhibit 3 demonstrates the crucial role of FX in local currency bond markets. As shown, appreciation against the U.S. dollar has been one of the key drivers of performance across the Asia-Pacific region this year, excluding only the Hong Kong dollar (which is pegged to the U.S. dollar) and Indonesian rupiah. In fact, for markets like South Korea and Singapore, the FX gains were so substantial that they surpassed capital and accrual gains, highlighting currency as a key performance component YTD.

Looking Ahead

The sheer diversity of the Asia-Pacific fixed income market presents both a challenge and an opportunity.  This brings us to the road ahead. With the broad theme of de-dollarization set to continue, will Asia ex-Japan or Asia-Pacific local currency fixed income catch the tailwind and gain from this wave?

To keep up with the performance of our suite of Asia-Pacific fixed income indices, please see our monthly APAC Fixed Income dashboard.

¹ iBoxx ABF Pan-Asia consists of eight eligible local Asian markets, including China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea and Thailand

² The iBoxx ALBI consists of 10 eligible local Asian markets, including China Onshore, China Offshore, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea and Thailand

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