Asia’s local currency ( LCY ) fixed income market has shown resilience despite the headwinds created by US “reciprocal tariffs” and the Iran-Israel conflict.

The Thai and Malaysian markets, in particular, have seen strong inflows over the past months, reflecting a wide asset allocation shift which market experts say has been partly due to US dollar movements and the prevailing de-dollarization sentiment.

In April 2025 alone, foreign investment flows into the Thai bond market reached about US$2 billion, the highest monthly level since February 2022, driven by expectations of central bank rate cuts and strength in the local currency, according to data from the Thai Bond Market Association.

In the same month, foreign bond inflows into the Malaysian currency rose to 10.2 billion ringgit ( US$2.31 billion ), the largest since July 2023 when inflows amounted to 11.3 billion ringgit, data from local credit rating agency MARC Ratings shows.

“I think investors are making asset allocation changes in response to the movements of the US dollar. Obviously, there's been talk of de-dollarization,” Kheng Siang Ng, head of fixed income, Asia-Pacific, at State Street Global Advisors, tells The Asset in an interview. “While we can't prove or currently say conclusively that that’s going to be a big trend, I think that's kind of a weight in the minds of some investors.”

While "de-dollarization" is a valid long-term theme, its immediate impact on portfolio flows is still debated. Much of the 2025 LCY demand is more likely due to FX expectations, rate differentials, and growth hedging than systemic moves away from USD assets.

Bright outlook

Ng maintains an optimistic outlook for Asian LCY fixed income even as geopolitical tremors threaten to disrupt fragile macroeconomic balances in the market.

The Iran-Israel conflict has pushed oil prices upwards. “Asian economies generally are energy importers, so that may create a little bit of imported inflation”, says Ng, although stronger local currencies have helped mitigate the impact.

Oil-driven cost pressures are expected to raise freight costs as vessels and flights reroute to avoid conflict zones in the Middle East. This could ripple through inflation data, affecting consumer prices and monetary policy outlooks in the region, Ng warns.

On the brighter side, local bond yields have declined across many Asian markets, driven by foreign inflows and expectations of further monetary easing as regional growth decelerates.

The yield premiums for 10-year LCY Asian bonds span a wide range, with Japan at 1.47% and China at 1.64%, significantly below US treasuries by 2.8-3.0 percentage points, while those for Indonesia LCY bonds are at 6.76% and Philippines at 6.39%, roughly 2.0pp above US 10‑year treasuries.

Investors seeking higher yields can target emerging Asian LCY bonds for a 2‑3pp premium over US treasuries but must accept higher currency and liquidity risks.

Those who are more risk-averse may prefer developed Asian bonds ( e.g., Japan, China, Singapore ) for duration exposure with diversification benefits.

Easing trend

Ng says while the Federal Reserve’s rate-cut trajectory remains uncertain, most Asian central banks are expected to maintain current policy rates, resume easing, or implement more rate cuts.

“Several already have, reflecting concerns over domestic slowdown and deflationary pressures. For instance, inflation in China and Thailand is near or below zero, providing room for rate cuts that could further support bond prices,” Ng says.

“We still feel that at the current cycle, the rates market will be better supported [than the credit market],” he says, but advises caution around high-yield credit, especially given tight spreads and slowing growth.

While bond markets have been surprisingly stable in the face of the Iran-Israel conflict, sentiment could shift quickly since current yields are not yet reflecting the full extent of the geopolitical risk. “If it is really a full-out war, bond yields shouldn’t be trading at this level, they should be lower by at least 50 basis points,” Ng argues.  

Growing investor appetite

This disconnect suggests investors may be underestimating tail risks. Nonetheless, Asian local currency bonds have delivered nearly 7% year-to-date returns in USD terms, highlighting both the resilience and relative attractiveness of the asset class amid global volatility, he says.

Ng highlights specific markets with policy support and favorable rate outlooks: Korea, Malaysia, Thailand, and India. Even China, while offering limited upside due to already-low yields, continues to serve as a volatility anchor in diversified portfolios. Meanwhile, Indonesia, with its fiscal uncertainty, remains a laggard.

He sees growing investor appetite for Asian local currency bonds, driven by a weaker US dollar and long-term diversification trends. The asset class, long overshadowed, may be seeing its moment of rediscovery.