SGD bonds still hot as interest rates stay low
Singapore
SINGAPORE-dollar (SGD) bond deals continue to hit the market, and are being snapped up by investors who fear the "low-for-long" interest rate mantra is sticking.
Yields have thus been falling, as strong demand leads to spreads tightening.
Clifford Lee, DBS Bank head of fixed income, said: "From last year to this year, yields of investment grade bonds have continued to tighten."
China Construction Bank Singapore branch on Monday priced three-year S$500 million bonds at 2.08 per cent, down from the initial price guidance of around 2.35 per cent, with orders reaching S$900 million.
Mr Lee noted that the new issues have traded up in the secondary market, and subsequent deals are being priced against the secondary market.
When bond prices rise, their yields fall, and vice versa.
The SGD 10-year swap offer rate (SOR) on Monday eased slightly to 2.245 per cent, which is off the year low of 2.065 per cent recorded on Sept 8. It is, however, still some ways from the 2.9025 per cent at the end of last year.
In the year to date, SGD bond issuances have come to S$19.6 billion, overtaking the S$19.2 billion for the whole of 2016.
Sales of perpetuals (that is, bonds with no fixed maturity) have risen much faster. In the year to date, there have been 16 perpetual deals worth S$4.7 billion. This is more than double 2016's full-year figure of S$2.1 billion from seven issues.
One bumper perpetual this year was HSBC's S$1 billion 4.7 per cent sold in June.
Santosh Bukitgar, Credit Suisse's Private Banking Asia-Pacific emerging markets fixed-income analyst, said: "Most of the new perpetual issuances were oversubscribed multiple times, and our thought is that this demonstrated that liquidity was chasing higher yields and higher appetite for duration risk in credits, and that investors feel comfortable."
Mr Lee predicted that Q4 will continue to be active.
Mr Bukitgar said the slower pace of Fed tightening, lower global inflation data and continued weakness in the US dollar (USD) in H2 2017 have led to higher liquidity for emerging market (EM) bond flows, despite a wave of restructuring news hitting the market.
Restructured bonds have mainly been those issued by the oil and gas sector.
He also noted that the USD-SGD swap rates have largely trended downwards due to the weak USD.
Swap rates are used as basics for pricing SGD bonds. The SGD has appreciated almost 7 per cent against the USD since the start of the year.
Todd Schubert, Bank of Singapore head of fixed-income research, noted that other factors such as low fixed deposit rates continue to fuel the clamour for bonds.
A 36-month fixed deposit earns 1.1 per cent at DBS.
Mr Schubert said: "Bonds still give investors an incremental yield above bank deposits. Issuers are looking to tap the market before the next Fed rate hike later in the year and the two to three more rate hikes in 2018."
Mr Lee said the demand for bonds, which is keeping yields in check, is also due to the amount of liquidity, which continues to build up. He added that interest rates may creep up, but the amount of liquidity is building faster than can be deployed by fund managers, insurers and pension funds, who, unlike individuals, cannot sit on cash.
He also noted that a new group of investors from China will add to the liquidity as the country opens up its capital market. "The opening up of domestic bond markets will allow investors to invest offshore," he said. China's bond market, the third largest in the world, is estimated at US$9 trillion outstanding.
Last week's S$240 million perpetual bond sale by Citic Envirotech at 3.90 per cent attracted orders of S$1.4 billion. Hong Kong investors got 32 per cent of the deal.
