U.S. government shutdown ends but still waiting for more data clarity

The resolution of the U.S. government shutdown signals the resumption of key economic data releases, including the September non-farm payrolls and other reports. However, some releases may be delayed due to disruptions in the underlying data collection process. We think the labor market still looks sufficiently weak to keep the Federal Open Market Committee (FOMC) on track for a rate cut at the December meeting, with the possibility of two additional cuts by mid-2026. This would bring the federal funds rate into the 3.0%-3.25% range. If the economy proves more resilient, the path to the Federal Reserve’s (Fed’s) neutral rate of 3.0% could be slower than current market expectations; however, the overall policy stance is likely to maintain an easing bias going forward.

U.S. dollar outlook: Overall trend remains broadly negative for the U.S. dollar

Expectations of further rate cuts by the Fed point to potential weakness in the U.S. dollar. The U.S. remains at the center of various growth shocks, including political uncertainty, tariff negotiations, fiscal concerns, and questions about the Fed’s credibility and independence. Market sentiment has frequently swung between extremes amid evolving macro developments; however, these factors make it unlikely that the U.S. dollar will benefit, and it may weaken further. In recent years, U.S. exceptionalism and the dominance of U.S. tech companies have led investors to favor U.S. tech stocks and corporates as risk-on trades. However, if risk sentiment deteriorates, investors may rebalance by pulling money out of U.S. equities and moving away from the U.S. dollar, adding further downward pressure. As a result, the traditional “dollar smile” framework—where the U.S. dollar typically strengthens in both extreme good and bad times—may not hold as reliably as it has in the past. While the timing of further U.S. dollar weakness is uncertain, the overall trend and macroeconomic environment remain broadly negative for the U.S. dollar.

Impact of a weaker U.S. dollar on emerging markets

A weaker U.S. dollar eases emerging market (EM) debt burdens and may create fiscal space for growth. When the U.S. dollar weakens against EM currencies, the local currency value of USD-denominated debt decreases, reducing repayment burdens for EM corporates and sovereigns. Progressive fiscal policies within Asia have also supported soft domestic demand, especially as more Asian central banks slow monetary easing after extended cycles (Exhibit 1). Fiscal policy has taken on a more proactive role, particularly in China and India, to mitigate weak domestic demand and deflationary risks. In China, increased fiscal spending targets local government debt and property sector challenges, while India emphasizes tax incentives and infrastructure development. Fiscal support in Indonesia, Korea, Taiwan, and Thailand should also boost consumer spending and growth resilience. Although Asian central banks are pacing themselves in terms of rate cuts, they retain the flexibility to ease further if local economic and inflation conditions warrant, which is positive for bond investors. 

EM credit performance and fund flows

Year-to-date, EM hard currency credit has remained resilient, with strong returns in USD emerging market debt (EMD) (12.2%) and USD Asian JACI (7.6%), supported by robust yields and favorable technical factors. Inflows have continued despite ongoing geopolitical risks. EM corporate credit has benefited from stable fundamentals and renewed fund inflows, especially as developed market sovereigns are no longer viewed as “risk-free” due to political developments. However, these inflows suggest steady, but still muted demand, with investors allocating incrementally rather than re-risking aggressively. This dynamic indicates that while carry remains attractive, positioning is not stretched.

Improving credit quality in Asia

Credit quality across Asian sovereigns and corporates is improving, with the Asian investment grade (IG) segment showing particular strength. Ratings have notably improved since August, driven by the S&P’s upgrade of India’s sovereign credit rating—the first in 18 years. This upgrade has led to upgrades of nine Indian companies. The high-yield (HY) segment has also shifted from elevated downgrades in 2021–2022 to marked improvement since 2024, as seen in rising upgrade/downgrade ratios and fewer downgrades. This trend points to a more stable and positive outlook for HY credit in Asia.

Asian corporates: Strong fundamentals

Asian IG corporates continue to demonstrate strong credit fundamentals, characterized by low leverage, high liquidity, and robust interest coverage. The net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio has declined from 1.0x in 2017 to 0.7x in the first half of 2025, indicating stronger balance sheets. Cash coverage of total debt has increased from 58% in 2017 to a peak of 66% in 2023, settling at 63% in 1H25, reflecting robust liquidity. Interest coverage ratios remain robust, starting at 14.7x in 2017 while standing at 14.2x in 1H25, with a peak of 18.4x in 2021. These metrics underscore lower default risk and solid fundamentals.

Within Asia HY, there were only five defaults totaling USD 7.5billion year-to-date, with the default rate likely dropping to 2.5% in 2026 from an estimated 3.5% this year, marking the fourth consecutive year of moderation. Excluding China, there have been no defaults so far this year. Concerns about China may ease going forward; while its property sector remains challenged, further defaults among surviving issuers are not anticipated, as many have regained market access or received strong parent support. Recent policy measures should also help stabilize the sector and mitigate additional stress.

For investors, this suggests that the worst of the default cycle is behind us, with improving fundamentals and lower risk ahead. Issuers also face a more favorable environment, with reduced default risk and potentially better access to capital. However, issuer sentiment remains cautious, with persistent net negative financing indicating more bonds are maturing than new supply being issued. This supply-demand imbalance may shift in 2026 as spillover demand from investors outside Asia rises amid investors’ diversification away from the U.S. 

Investment implications

Asian credit continues to present selective opportunities. More compelling are Asian hard currency corporate bonds, which benefit from improving credit ratings, lower default rates, strong regional as well as corporate fundamentals, and constructive technical factors. Asian bonds also stand out as under-owned and uncorrelated assets that should help enhance portfolio diversification and resilience. Overall, diversified yields can be found across the fixed income spectrum, but active allocation and a focus on quality remain crucial, especially as stretched valuations leave little margin for error. 

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