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Singapore bonds continue to perform amid Swiber collapse

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SINGAPORE bonds continue to hit new highs despite the high profile collapse of Swiber debt.

Fixed income bankers say the bond market is doing well because of low interest rates, which is also a global phenomenon.

The Markit iBoxx Singapore corporates return index hit a record 117.43 on Aug 1 and is up 3.3 per cent year to date (YTD).

Another measure, the Singapore Fixed Income Index (SFI), for the week ended July 29 has outperformed the STI by 5.90 per cent YTD, according to the Singapore Exchange (SGX).

YTD, the SFI is up 5.41 per cent - comparing similar periods (January to July) in the SFI's eight-year history, the SFI has performed strongest in 2016, said the SGX. On a year-on-year basis, the index is up 6.32 per cent and this time last year, the index was up 0.54 per cent.

"Globally, corporate bonds have generally outperformed equities thus far this year, a phenomenon that has been mirrored in Singapore," said Todd Schubert, Bank of Singapore head of fixed income research.

The main reason for this is that central banks' accommodative monetary policies have created a "lower for longer" interest rate environment that is positive for bonds, he said.

In Singapore, the three-year and five-year swap offer rates saw yields drop by around 100 basis points thus far this year, tracking very closely the trend of similar maturity US Treasuries, Mr Schubert said.

"Furthermore, equity performance depends on earnings momentum and beating consensus earnings expectations while bonds are driven by the ability to pay principal and interest on a timely basis," he said.

"Hence, the slowdown in the Singapore economy has impacted the former much more than the latter," he said.

Even the recent collapse of Swiber bonds has not dented sentiment, rather it's driving investors to the less risky investment grade (IG) issues.

Terence Lin, assistant director of bonds and portfolio management at fund researcher iFast said that the main driver this year for SG bonds has been the decline in rates and long dated high quality paper has been outperforming lower quality credit.

"Swiber has just added to the uncertainty and lack of confidence in high yield names, but also helped to fuel more interest in safer SGD credit," said Mr Lin.

Swiber is the third SGD bond to default in recent memory, joining Trikomsel and Pacific Andes Resources Development. The amount defaulted by the three comes up to almost S$1 billion.

Said Clifford Lee, DBS Bank head of fixed income: "In terms of general market tone, it's extremely firm and constructive."

He noted that since 2013, the market has seen some S$80 billion of issuance.

The recent defaults while painful for investors is "not broad based, won't unnerve the market as a whole", said Mr Lee.

What it has done is to make it harder for smaller companies to access the bond market, he said.

The biggest supply of bonds from small and medium enterprises was in 2013 and 2014, thereafter it halved in 2015, he said.

Despite the recent negative news on Swiber, the vast majority of corporate bonds in Singapore have been issued by banks and real estate companies, said Mr Schubert.

"So even if we have additional defaults stemming from the oil and gas industry, the overall impact should be fairly modest overall," he said.

One fixed income banker noted that SGD bonds have underperformed USD bonds, and weaker SGD issues have liquidity problems.

Devinda Paranathanthri, UBS Wealth Management director, Chief Investment Office said that SGD corporate bond index has returned 4.15 per cent, and this has underperformed compared to USD bond indices.

"Index performance alone does not show the challenges in the market such as liquidity," he said.

Emerging market fixed income as an asset class has performed well YTD: Asia USD credit is up 8.08 per cent and EM USD credit has gained 10.36 per cent.

"This is due to lower US Treasuries rates and lower credit spreads. SGD bond market has underperformed in this context," he said.

"Additionally, liquidity has dried up substantially in the SGD market following the Swiber default, making it difficult to trade some of the weaker issuers, particularly in the oil & gas sector," he said.