Asian high-yield debt has emerged as a surprising global winner, returning 4.3% this year versus 2% for US peers, beating two dozen key global debt gauges according to Bloomberg data. Chinese borrowers account for the largest share of these notes, which extended outperformance as the gap between Chinese and US benchmark yields widened to a record. The dominance stems from stronger fundamentals: near record-low borrowing costs in China and faster regional economic growth translating into fewer defaults. Yield premiums tightened to a record low last week despite headwinds including a likely Federal Reserve rate hike and rising oil prices from Middle East conflict.

"The vast majority of high-yield issuers in Asia are also able to access local currency funding that is comparable or cheaper than offshore US dollar funding," said Mel Siew, head of Asia public credit at Muzinich & Co. Moody's Ratings reported 43 corporate issuer defaults in the US through July, 20 in Europe, Middle East and Africa, and only one in Asia Pacific. However, rising US yields and Fed hikes could pressure Asian central banks outside China to lift rates. Chinese junk dollar bonds gained 0.2% this month while broader Asian high-yield lost 0.3%, still outperforming most other bond classes.

Driving outperformance is a rebound in stressed borrowers including Hong Kong developer New World Development Co. and lower issuance volume. Asia ex-Japan junk bond sales climbed 20% to $12 billion this year from non-financial firms, compared to over $220 billion in the US. Rishi Jalan, Citigroup Inc.'s head of Asia-Pacific debt capital markets, noted tech and data centers could drive high-yield volume. Japanese issuers like Soft Bank Group Corp. are also increasing their presence, planning a $10 billion to $20 billion debt offering.