Asia credit markets slipped in 1Q2026, ending the quarter down 0.5% and breaking four straight quarters of gains, as the Middle East conflict widened spreads by 19 basis points and pushed US Treasury yields up 18 basis points, according to JP Morgan’s Asia Credit Outlook 2Q2026.
Despite the losses, Asia credit outperformed US and emerging-market peers, which JP Morgan attributes to stronger technicals, higher credit quality, and a better starting position.
Soo Chong Lim, head of Asia credit research at JP Morgan, says Asia “has become more of a net capital exporter than importer”, underpinned by deep demand from regional banks — in particular, Chinese banks — Asia and emerging market (EM) funds, insurers, central banks and private banks’ clients.
A heavy share of government-related entities, which account for two-thirds of the index, has underpinned and anchored the credit fundamentals of Asia credit. Strong technicals (demand overwhelming supply), resilient fundamentals and short durations have kept Asia credit relatively resilient despite macro headline news.
New issuance fell 21% y-o-y to US$57 billion ($72.9 billion) in 1Q2026, resulting in negative net financing of US$7 billion, which JP Morgan says are conditions that helped support investment-grade performance. Asia investment grade (IG) returned 0.2% against losses of 0.5% and 2.3% for US IG and Latin America IG respectively.
High-yield (HY) lagged, according to JP Morgan, hurt by a smaller investor base and negative EM hard-currency fund flows after the conflict. Meanwhile, China HY property lost 3.3%.
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JP Morgan nonetheless expects Asia HY defaults to moderate further to 1.8%, or US$3.3 billion, in 2026, reflecting a cleaner starting position after years of significant market clean-up.
Asia HY has outperformed US HY over the past three years with higher returns and shorter duration, says Harsh Singh, head of flow credit sales in Asia ex-Japan at JP Morgan.
The bank sees the main risk in an “energy shock to macro” if the Strait of Hormuz faces prolonged disruption. Early signs of fuel rationing in India, Vietnam, the Philippines and other Asian economies are on its watchlist, although the transmission to credit has been limited so far.
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Export-driven markets like South Korea, Taiwan and Singapore are being cushioned by strong tech exports, and Asia IG spreads have behaved more like developed-market credit, widening only modestly during recent Middle East flare-ups.
With the conflict now in a “fragile pause”, JP Morgan sees “the path of least resistance” as sideways, projecting “the JACI (JP Morgan Asia Credit Index) to close the year relatively flat at SOT+108 (Shortening of Trust), which should translate into a 4.9% total return till year-end, or 4.4% total return for the full year.”
They expect 2026 to remain “a year of carry rather than beta”, and are making three tactical shifts: moving to “neutral” for both IG and HY from an earlier IG preference, turning indifferent between financials and corporates, and extending duration given the steep yield curve.
Structurally, it also flags the broader Asia-Pacific opportunity via the JACI Asia Pacific Index — which adds Japan and Australia for about US$1.45 trillion in market cap, the rise of Australian dollar credit as a third major currency market, and gradual growth in offshore renminbi, where select issues can offer a 10-20 basis point US dollar pickup after swaps.
Together, these trends underpin JP Morgan’s view of Asia credit as a mature, internally funded asset class where carry, quality and tight supply continue to anchor returns despite a soft first quarter.
