Singapore bond market resilient amid stockmarket rout

Singapore

SINGAPORE bond investors are doing pretty well as prices remain resilient amid the stockmarket rout.

"In choppy markets, bonds are more defensive," said Clifford Lee, DBS Bank head of fixed income.

Although most bond prices are off their highs seen this year, there's little panic selling as fixed income investors stay the course in the flight to quality, he said.

The Markit iBoxx Singapore corporates total return index stood at 113.5925 last Friday, just fractionally off the all time high of 113.6704 reached on Aug 11.

Another bond index, the Singapore Fixed Income Indices (SFI) rose 0.18 per cent to 120.50 for the week ended Aug 21, said the Singapore Exchange.

The SFI's 0.18 per cent gain was in contrast to this year's largest weekly decline in the Singapore equity market. The Singapore equity market, as represented by the Straits Times Index (STI), declined 4.60 per cent last week; this is the STI's largest weekly decline since the week of Aug 8, 2011 (-4.81 per cent).

The SFI's increase was largely attributed to the government bond segment, with the SFI government bond index gaining 0.27 per cent last week.

The corporate bond segment (SFI Corporate Bond Index) remained relatively flat, gaining a marginal 0.03 per cent last week. The segment was weighed down by corporate financial bonds, with the SFI financial bond index declining 0.09 per cent. This is the index's first weekly decline after gaining for seven consecutive weeks.

Fixed income bankers said local bond investors are typically individuals who have holding power, and who are familiar with the issuers.

Said Devinda Paranathanthri, UBS Chief Investment Office, Asia credit analyst: "SGD bond investors are here for the long term. They are largely private banking investors with existing SGD liquidity rather than money managers who actively manage portfolios."

"This also means that in bouts of risk aversion, such as the one we are witnessing now, we will see less volatility in SGD bonds compared to other Asian fixed income asset classes such as the USD bonds," he said.

Mr Lee noted that these long-term investors continue to deploy their funds in high grade bonds despite the volatile financial markets.

Last Thursday, a S$1.2 billion issuance comprising two tranches - seven-year and 12-year - was sold by the Land Transport Authority of Singapore.

On Monday, the LTA bonds were quoted at slightly above par.

The seven-year LTA 2.57 per cent bonds were quoted at 100.10 and 100.30 while the 12-year LTA 3.09 per cent bonds were quoted at 100.15 and 100.45, said Mr Lee.

He said the longer dated bonds are doing even better because investors are looking for yields.

According to Neel Gopalakrishnan, Credit Suisse Private Banking and Wealth Management Emerging Markets Bond Analyst, support for the bond market is due to the fact that investors are also more familiar with the issuers, though the support is not universal.

"Bonds from the relatively better quality issuers have held up in price reasonably well while those from relatively weaker issuers and commodity related names have seen a bigger sell off," he said.

"A key supporting factor is that most investors in SGD bonds are local. The fact that investors closer to home have put their money in these bonds and their familiarity with these issuers, would cause less panic when there is a market sell-off," said Mr Gopalakrishnan.

"Most SGD bonds also tend to be shorter tenor (usually less than three years) and tend to be less volatile. Also, many of the bonds are largely held by private banks, which face less redemption pressure compared to fund managers," he said.

Another support factor is that the default rate by local issuers is very low, said Todd Schubert, Bank of Singapore, head of fixed income research.

"Holders of SGD bonds are primarily local retail investors. They tend to be comfortable with these Singapore brands and are more willing to hold on to them during a downturn," he said.

"The historical default rate for SGD-denominated bonds issued by Singapore-domiciled companies is very low," said Mr Schubert.

DBS's Mr Lee said even in the current volatile market, he expects more issuances by high quality credits because investors are still looking for yield.

"We are encouraging them to issue ... to lock in the rates now," he said.

The key three-month Sibor or Singapore interbank offered rate which is used to price home loans rose to 0.99600 per cent on Monday from last Friday's 0.93825 after the SGD fell to a fresh five-year low against the greenback. It stood at S$1.4126 at 18.22 and year-to-date, the SGD has fallen about 6 per cent.

The three-month SOR or swap offer rate - typically used for commercial loans - rose to the year's high of 1.20457 last Friday.

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