Asia and emerging markets are poised to take centre stage in the evolving fixed income landscape. As global macroeconomic dynamics shift and the traditional fixed income playbook evolves, institutional investors are reassessing where risk is best rewarded. Recent market optimism has strengthened the case for fixed income but delivering outperformance in 2025 requires deliberate focus on diversification, valuation discipline, and identifying areas of structural resilience.

A compelling case for fixed income

The backdrop for fixed income entering 2025 is more attractive than it has been in over a decade. Despite compressed spreads in several markets, yields remain compelling. Investment-grade credit in developed markets offers yields in excess of 5%, while high-yield segments are delivering yields upwards of 7%.¹ This presents a strong total return proposition for investors who have previously sat on the sidelines or want to diversify their equity exposure.

However, a closer look at credit spreads reveals some caution. Valuations are tight by historical standards, with spreads across both investment grade and high yield near multi-decade lows. That said, corporate earnings are holding up and we believe this will continue in 2025. Consequently, opportunities are most compelling in non-cyclical sectors and among high-quality credits lower down the capital structure, such as hybrid bonds or higher quality high yield, where investors can be adequately compensated for additional risk.

Asia and Emerging Markets are more than just a diversifier

In contrast to the US, Asia and emerging markets are underpinned by more stable macroeconomic fundamentals. Inflation is well contained across most major markets, and policy easing cycles are already underway in economies such as India and China. This provides a supportive backdrop for local currency bond markets, providing comfort to investors that they are taking risk in markets where monetary policy is on their side.

Importantly, Asia’s fixed income opportunity set is broader and more sophisticated than often perceived. Regional credit markets now offer significant depth and diversity – across sovereign, quasi-sovereign, and corporate issuers. Active managers with adequately resourced research teams are also beginning to include the Middle East in their Asian universe, which can add both investment returns and diversity to portfolios. Meanwhile, frontier markets, particularly those with IMF-backed reform agendas, continue to deliver outsized returns for investors willing to tolerate elevated risk.

Private credit – extending the toolkit

Private credit has emerged as an increasingly important component of the fixed income toolkit for institutional investors. While many investors remain in the early stages of deployment, the opportunity to access additional yield through illiquidity premiums and more bespoke credit structures is gaining traction.

Private placements offer a natural starting point – extending from traditional public investment-grade credit into structures that provide yield pickup without materially increasing credit risk. Beyond this, investors are actively exploring strategies such as infrastructure debt and fund financing, particularly in Asia where development financing needs align with long-term investment mandates.

Fund finance, in particular, has become a fast-growing segment, encompassing structures backed by limited-partner commitments, general-partner capital, or underlying net asset value. These offer attractive yield enhancement opportunities with varying levels of complexity and risk, allowing investors to tailor exposures to specific return and liquidity objectives.

ESG isn’t a trend, it’s a risk lens

There has been a lot of noise in markets over the last year that environmental, social, and governance (ESG) considerations were simply a trend in investing that is no longer in vogue. However, the reality is that this is simply not the case. ESG risk assessment is not optional – it is integral to credit research and pricing.

Governance has always been central to fixed income investing, with governance risk leading to 50% of all distressed issuers in debt markets. In addition, sustainability-related risks directly affect balance sheet strength and refinancing capacity. So, despite what administrators may suggest, climate change is not something issuers can ignore due to a change.

For investors with a long-term horizon, sustainability-linked credit – supported by credible frameworks and measurable KPIs – offers a way to align investment objectives with broader societal goals. In Asia, where official institutions are increasingly active in promoting sustainable development, private capital will play a key role in bridging infrastructure financing gaps and supporting a just transition.

A resilient and evolving asset class

The outlook for fixed income in 2025 is robust, but success hinges on selectivity and strategy. Public and private credit markets offer distinct opportunities, while Asia and emerging markets present structurally attractive alternatives to traditional developed market exposures.

With volatility likely to persist and interest rate cycles diverging globally, fixed income is no longer a passive allocation – it is a space for active management, conviction, and innovation.