Implications of “Reciprocal Tariffs” on Asian Fixed Income

• Risks to Asia’s export-driven economies have risen.
• We will pay greater attention to the domestically-oriented areas with limited direct exposure to US trade flows.
• The current risk-off is primarily due to elevated macroeconomic uncertainty, rather than deteriorating Asian credit fundamentals.
• Credit fundamentals remain relatively healthy, and financial institutions are well-capitalised.
• We expect deeper and broader policy rate cuts in Asia.
• We are adopting a more constructive duration view in our Asian fixed income and SGD bond portfolios.
• Singapore’s credit market has been resilient, despite headwinds for its open economy. Strong domestic liquidity and a defensive investor base continue to anchor spreads.
• An increasingly dovish posture by the MAS is likely.
• On the FX front, we are selectively positioned across regional Asian currencies where the macro fundamentals and policy trajectories are more supportive.

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On 2 April (US time), the U.S. announced a new 10% baseline tariff set to take effect on 5 April, alongside additional reciprocal tariffs of up to 49% on some economies starting 9 April¹ . According to President Trump, the individual tariff rates were derived from a combination of existing tariffs, non-tariff barriers, currency practices, and tax policies.

Asian rates outlook and portfolio strategies:

The escalation of US tariffs poses a renewed risk to Asia’s export-driven economies. Overall, the scale and structure of these tariffs appear more aggressive than initially anticipated—particularly for Asian economies, many of which run sizeable trade surpluses with the US and therefore face steeper reciprocal tariffs. Notably, given the starting point on the reciprocal tariffs for several countries, including key Asian markets are very high, there could be some room for potential negotiations—through dialogue, carve-outs, or phased implementation which remains important to monitor. While this may mitigate the immediate impact on regional trade, we do not expect Asian trading partners to be entirely shielded from ongoing tariff pressures.

Notably, China faces one of the steepest tariff increases under the latest US trade measures. Compared to 2018, the economic impact is likely to be more pronounced for two key reasons. Firstly, the current tariff escalation is rooted in broader US strategic objectives—namely, protecting sensitive industries and reshoring domestic production. This marks a shift from cyclical to structural protectionism, raising the bar significantly for any future negotiations or tariff rollback. Secondly, trade diversion channels are narrower this time. In 2018, some Chinese exports were rerouted through third countries such as those in Asia, to bypass tariffs. With a broader application of tariffs across the region today, those reallocation mechanisms are far less effective.

Importantly, we see these trade-related risks intersecting with an increasingly accommodative policy environment in Asia. Across the region, inflation has largely normalised, giving central banks greater flexibility to shift their focus toward supporting growth. Institutions such as Bank of Korea (BOK), Bank Indonesia (BI), the Monetary Authority of Singapore (MAS), Bank of Thailand (BOT) and the Reserve Bank of India (RBI) have already begun to ease or signalled openness to doing so. In addition, the higher US tariffs on China could result in more trade diversion to the region. That could add to disinflation pressures in some Asian countries.

Reflecting this, we now expect deeper and broader rate cuts across the region than previously anticipated. Markets such as Korea, the Philippines, and India are at the forefront of this easing cycle, and we have revised up our expectations for policy easing in economies like Thailand, where macro conditions justify more proactive support. Even as nominal rates decline, real yields are expected to remain elevated relative to historical norms, preserving the relative attractiveness of Asian bonds. Turning to China, we expect Chinese authorities to intensify both monetary and fiscal easing to cushion the economy and contain downside risks. On the fiscal front, Beijing is likely to accelerate the implementation of the previously announced stimulus package outlined at the National People’s Congress (NPC). This includes increased funding for trade-in subsidies, corporate equipment upgrades, and broader infrastructure investment. Other areas of focus include strengthening household income, improving the social safety net, and encouraging more diverse and sustainable consumption activity.

On the monetary side, we anticipate a combination of reserve requirement ratio (RRR) cuts and modest policy rate reductions. Front-end Chinese Government Bond (CGB) yields are expected to remain anchored by monetary easing, while the long end may remain steep due to fiscal expansion and increased bond issuance. Should macro conditions deteriorate more sharply, or trade tensions escalate further, we expect Beijing to deploy targeted, incremental stimulus to further buffer growth. Unlike in 2018, we do not foresee a sharp devaluation of the renminbi (barring a significant step up in external shocks or tariff tensions). However, we do not rule out a managed depreciation of the CNY as part of the broader policy toolkit to absorb external shocks and support competitiveness, especially as export momentum slows.

In terms of portfolio strategies, we have been running with an overweight to duration given our more constructive view on duration vis-à-vis FX. We continue to look for opportunities to extend our duration overweight further, particularly where policy easing is gaining momentum and inflation remains contained – such as in Korea, and Singapore. In contrast, we have lower conviction calls on Asian currencies with a greater focus on relative valuation plays rather than outright directional bets. We are selectively positioning across regional currencies where macroeconomic fundamentals and policy trajectories are most supportive. Currently, we favour long positions in INR and PHP against short exposures in the SGD, THB, and RMB. These positions reflect our constructive view on growth differentials, monetary policy stance, and external balances across the region.

In the medium term, we hold a higher-conviction view that the US dollar will resume a weakening trend, driven by narrowing interest rate differentials and a softer US growth outlook. In addition, renewed focus on US fiscal sustainability may exert further downward pressure on the dollar, reinforcing the case for selective exposure to higher-yielding or undervalued currencies.

SGD bond outlook and portfolio strategies:

The recent escalation of US tariffs introduces renewed external headwinds for Singapore’s open, trade-dependent economy. Singapore’s exports face a 10% tariff which is lower than those imposed on many ASEAN peers. The relatively smaller competitiveness shock may cushion the immediate impact, and critically, the absence (so far) of punitive sector-specific tariffs on pharmaceuticals and semiconductors, which are key Singapore exports, offers near-term relief.

Nonetheless, the broader implications for trade flows, corporate investment, and global supply chains could reinforce indirect drags on Singapore’s economy. As such, while GDP growth is projected at 1–3% in 2025², the balance of risks remains tilted to the downside. On the policy front, softer core inflation and rising external uncertainties have increased the likelihood of a dovish shift from the Monetary Authority of Singapore (MAS) at the upcoming April MPS meeting. Core CPI has declined for five consecutive months, registering 0.8% y/y in January and 0.6% y/y in February³, with disinflation visible across a broad range of categories. Combined with higher US tariffs, this could justify a more accommodative stance by MAS. In the face of renewed global uncertainty stemming from recent tariff announcements, we also observed the SGD credit market has remained notably resilient. Credit spreads have shown remarkable stability, underpinned by flush domestic liquidity and a defensive market structure, characterised by a deep and predominantly institutional investor base. This structural support, primarily from large regional asset owners and central institutions, continues to anchor spreads even as external volatility rises.

In terms of portfolio strategies, our bias remains constructive on duration, especially in a scenario of slower growth, softer inflation and potential policy easing. Within SGD credit-focused strategies, we may selectively participate in new issues only where valuations are compelling and supported by positive internal credit views. Our high yield exposure remains moderate by historical standards and is focused on issuers where we maintain strong conviction. We will look to deploy additional capital into high yield opportunities should market dislocations arise from tariff-related sentiment shifts.

In SGD rate strategies, we continue to underweight the long end of the curve (30-year and beyond), anticipating a further normalisation of the yield curve. Additionally, we maintain an overweight position in statutory board bonds, which offer relatively attractive yield pickup and enhances portfolio carry in a cautious macro environment.

Asian credit outlook and portfolio strategies:

From a systemic risk perspective, the current environment differs meaningfully from past cycles. The recent market weakness reflects a technical recalibration driven by higher risk premia across risk assets. Unlike previous episodes, the current sell-off is primarily a response to elevated macroeconomic uncertainty rather than a deterioration in Asian credit fundamentals. While equity markets have corrected, there is no clear evidence of contagion from the banking or property sectors. Credit fundamentals remain relatively healthy, and financial institutions are well-capitalised.

Financials and quasi-sovereigns are among the major sectors in Asia credit, and both are predominantly domestically focused with limited direct exposure to U.S. trade flows. As such, the impact of tariffs is expected to be more indirect—likely materialising through a broader slowdown in regional economic activity rather than through direct export disruptions. In a trade-driven downturn, softer domestic demand and tighter funding conditions could weigh on credit fundamentals, particularly for more leveraged issuers in the property sector.

Other key sectors like utilities, transport, infrastructure, and TMT (technology, media, and telecommunications) also have limited direct exposure to US tariffs. These industries are largely domestic in nature, although there may be some secondary effects: for instance, transport and infrastructure could experience reduced travel and port volumes, and utilities may face higher input costs. TMT issuers, which in Asia credit are primarily telecom and internet companies, remain relatively insulated due to the domestic-oriented nature of their operations.

In contrast, sectors such as oil & gas, industrials, and metals & mining are more directly exposed to trade-related headwinds. Oil prices tend to be highly sensitive to global growth and trade sentiment, which can create challenges for smaller, independent exploration and production (E&P) companies. Metals & mining issuers are vulnerable to declining commodity prices that typically accompany trade-related slowdowns. Similarly, industrial names—particularly those integrated into global manufacturing supply chains—face higher exposure to both demand-side and supply-side trade disruptions. That said, these risks are somewhat mitigated by ongoing and planned capacity expansion in the US (as seen among Korean automakers and tech firms), as well as by the generally strong balance sheets across much of the sector.

In summary, the direct fundamental impact of US tariffs on Asian credit is broadly manageable, as most of the larger sectors in the region’s credit universe do not have material direct exposure to US trade flows. Instead, we continue to focus on the indirect effects, including the potential for weaker macroeconomic growth, softer consumer and business sentiment, and a slowdown in domestic activity. Additionally, volatility and sell-offs in US credit markets could spill over into Asia, amplifying risk aversion and driving spread widening. The extent to which these pressures are offset by domestic policy responses aimed at supporting growth will be a key factor to monitor.

In terms of our Asian credit portfolio strategies, we have been gradually extending duration and are well-positioned to benefit from the recent rate rally. Some of the duration extension has been added selectively through participation in new issues. Our bias remains toward further extending the overweight, although this will be valuation-dependent—particularly in light of the sharp, knee-jerk rally in US Treasuries.

Elsewhere, we have selectively taken profits and reduced exposure to the high yield sector, particularly given its relatively resilient performance in recent months. This more measured approach allows us to manage risk while retaining flexibility to redeploy into more attractive opportunities should valuations become more compelling. Within high yield, our positioning remains focused on issuers with stable credit fundamentals and predominantly domestic demand drivers—traits that provide a more defensive tilt in the current macro environment.

 

¹ Source: The White House, April 2 2025.

² Source: https://www.mas.gov.sg/news/monetary-policy-statements/2025/mas-monetary-policy-statement-24jan25.

³ Source: MAS Core Inflation, SMASCORE Index in Bloomberg.

 

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