Executive Summary

• US macro, rates, and credit outlook: as a base case, we expect the Fed to keep policy rates on hold through YE2025, and begin cutting in 2026 by 25 bp per meeting, totaling 100 bp by June 2026; we forecast UST 10Y yields to rise to 4.75% by YE25 before declining to 3.5% by June 2026; we forecast US IG and HY spreads to widen to 110 bp and 350 bp by YE2025 and to 130 bp and 450 bp by June 2026 due to an erosion of credit fundamentals, higher volatility and decelerating technical strength; we recommend duration risk over credit risk.

• Despite US tariff uncertainties, US rates volatility, and escalating Middle East tension, Asia IG credits ground tighter and outperformed US IG and Euro IG credits in total returns YTD; this was supported by a benign macro backdrop, decent-all-in yield, and strong technicals.

• Over the near-term, we expect Asia spreads to trade sideways, muddling through US tariff headlines, geopolitical risks, and a data-dependent Fed; however, as our US strategy team expects US corporate earnings to weaken as early as 4Q25, the US labor market to materially soften and UST yields to decline in 1H26, we see the risk of Asia IG spreads to widen to 100-110 bp by YE2025 and 130 bp by June 2026 due to a pullback in risk sentiment and lower all-in-yields.

• For investors with APAC IG mandates, we recommend a barbell strategy for portfolio credit risk, with positions in both defensive credits with spreads and our preferred IG beta names; despite limited room for further spread compression, we see value in holding Asia IG credits for carry.
• We maintain our preference for duration risk over credit risk; we recommend gradually adding duration when UST 10Y yields reach 4.5%; with UST 10Y yields mostly below 4.5% since mid-Feb, we would focus on short-dated carry.
• We still view diversification across markets and currencies as the best way for Asia credit investors to protect their portfolio returns; we have Outperform recommendations on all Japanese lifers, major UAE banks, and selected GCC quasis; we see value in Asia local currency bonds, particularly AUD.
• The pace of Asia ex-Japan $ new issues YTD ($101 bn; 60% of our full year projection; +9% YoY) was slightly faster than our expectation as issuers pulled forward funding plans ahead of the “Liberation Day” and US reciprocal tariff deadline in July; maturities/calls were $106 bn over the same period, resulting in a negative net supply of $5 bn; for the rest of 2025, we expect $70 bn of Asia ex-Japan $ new supply, against $73 bn of maturities and $12 bn of financials and corporate perps that we expect to be called; this would result in a negative net supply of $15 bn.
• We upgrade Asia IG Utility and Asia IG Banks to Outperform, and assign Outperform recommendations to Asia IG Leisure and Asia IG Autos; we downgrade Asia IG Basics to Underperform; we upgrade Asia IG Energy and Asia IG Sovereigns from Underperform to Market perform; we downgrade Asia IG Retail and Asia IG Consumer Goods from Outperform to Market perform; meanwhile, we maintain Market perform recommendations on Asia IG Banking, Financial Services, Insurance, Capital Goods, Media, Technology & Electronics, and Local Authority sectors.