On June 11th, Ding Yifei, senior investment manager of Invesco, wrote that he has a more positive outlook on local currency bonds in Asia rather than hard currency bonds. Considering the widening yield curves of US Treasury bonds and other developed market government bonds, the yield of local government bonds in Asia has remained at relatively high levels. The high absolute yield is attractive to local investors seeking risk-free returns. With global inflation rising and major central banks like the Federal Reserve maintaining high interest rates, most Asian countries have raised interest rates in recent years. Ding Yifei pointed out that in the first half of 2024, the spread of emerging market hard currency sovereign bond yields in Asia continued to tighten. The absolute yield spread of this asset class is at its tightest level since the global financial crisis. The overall yield spread of emerging market hard currency sovereign bonds has also narrowed. However, the yield spread of the emerging market bond global core index is still far from the tight levels seen after the global financial crisis. In recent years, the credit fundamentals of Asian emerging market sovereign issuers have continued to improve. However, relative value between Asia and other emerging markets has become less favorable. The technical factors of Asian emerging market hard currency sovereign bonds are relatively balanced, with capital outflow pressures and net redemptions largely offsetting each other. However, in terms of demand, due to concerns about valuation, global capital continues to flow into developed market bonds rather than emerging markets and Asia. On the other hand, Asian local investors are keen to buy US dollar bonds issued by their own governments. Due to improvements in the fiscal conditions of local governments in the region or lower domestic financing costs in recent years, the issuance volume of hard currency sovereign bonds in Asia is relatively low compared to other emerging markets. Ding Yifei stated that currently, the global macro environment appears stable. The market generally expects developed markets to achieve a soft landing, and the macroeconomic outlook for emerging markets is not overly worrisome. In this basic scenario, risk assets are expected to benefit from a stable macro environment, so Invesco expects other emerging markets to outperform Asian emerging market hard currency sovereign bonds. In the unlikely scenario of a market sell-off, Invesco believes that strong local demand will help Asian emerging market sovereign bonds outperform other regions. For domestic investors, the yield of Asian local government bonds is attractive relative to historical levels. Overall, Asian governments have performed well in achieving macro and fiscal targets in recent years. Another driving factor is population structure. In most Asian markets, the size of middle-income households is rapidly increasing, leading to historically high investment demand. Asian local government bonds are considered risk-free investments for domestic investors, making them a suitable investment choice for new investors in this asset class. Meanwhile, Invesco states that due to the Federal Reserve maintaining interest rates unchanged due to domestic inflationary pressures, the relative yield increase of this asset class compared to US Treasury bonds is not very attractive. Invesco expects that once the Federal Reserve and other developed market central banks start cutting interest rates, international investors will find Asian local interest rates attractive. However, as the market has already reassessed the Fed's rate-cutting cycle for the rest of this year, Invesco believes that the recent strength of the dollar will fade before the end of the year. Due to exchange rate effects, Asian emerging market government bonds priced in local currency have underperformed recently. Once the dollar's strength fades, Invesco expects Asian local currency government bonds priced in dollars to show positive performance.