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[SINGAPORE] Rising benchmark rates in Singapore are reducing the appeal of bonds to wealthy individuals, as it becomes more expensive for them to buy on the margin.
On Monday, the six-month Singapore dollar swap offer rate peaked at 1.295 per cent, a five-year high and more than double the level two months earlier.
Typically, the closely followed SOR curve is the base rate for the margin loans that private banks offer to their high-net-worth clients. Bond yields have risen, but at a slower pace, squeezing returns for investors that rely on leverage to boost yields.
Five-year Singapore Government securities, for instance, were yielding 1.74 per cent on Wednesday, just 53bp over the six-month SOR. The spread between the two benchmarks has been at its tightest since December 2013.
Private banks usually charge around one per cent over three-month or six-month SOR for margin loans backed with high-quality bonds. A stubbornly low SOR had given investors easy access to cheap leverage throughout 2014.
Leveraged PB orders fuelled a surge in high-yield bond sales last year, but a selloff in oil-related Singapore dollar bonds in December poked holes in that strategy and rocked demand for riskier credits.
Bond sales slumped in the first two months of 2015 and the deals that have come to market have been mainly from higher-rated institutions.
"Last year, PB clients would be paying around 1.3 per cent-1.4 per cent to buy bonds that would pay yields of 5 per cent, which was a good deal for them," said one head of debt capital markets.
"Now, however, with the higher SOR rates, the investors will pay close to 2 per cent if they buy bonds on the margin and those that come to market are paying less."
December's selloff has also reduced the willingness of PBs to extend margin financing, and the more cautious approach has also contributed to a fall in leveraged orders.
For bonds issued this year, PB clients have been offered an average of 50 per cent-60 per cent of margin financing on their purchases, rising to 70 per cent-80 per cent on recent issues from high-rated borrowers.
Bankers say the shifting dynamics have reduced liquidity for smaller and lower-rated companies, making it harder for investors to change their allocations. The December selloff coincided with the traditional lack of liquidity towards the year-end and some bonds, mainly oil-related paper, remain below cash prices of 95.00.
PB investors are less concerned about mark-to-market losses, but they seem resigned to collecting the higher yields on their existing bonds, rather than the lower yields now being offered in the primary market.
"While private banks' end clients are generally still constructive on the bond market, they have, in recent months, not been able to change their investment strategies or switch out of existing holdings as easily as they could have in the past," said Winston Tay, head of South-East Asia bond syndicate at RBS.
Bankers, however, say they continue to see real demand for fixed-income assets from the PB community.
Some S$2.2 billion (US$1.6 billion) of bonds has been sold to date in March - more than the S$1.7 billion printed in the first two months of this year.
"The PB appetite is always there," said one analyst for a private bank. "What has changed is that they have become more selective in credits, structures and pricing. They have very limited alternative routes to make their cash work. The stock market is moribund, deposit rates are depressed and the property market is in a downturn."