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REVIEW 2016

Singapore bond market ending the year with a whimper

New issuances for the first 11 months down 15% from the corresponding period last year; full-year volume may be the slowest since decade began
Tuesday, December 6, 2016 - 05:50

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The local bond market is ending the year with a whimper - beset with anxieties over upcoming interest rate hikes and uncertainty over the incoming policies of the next US president.

Singapore

THE local bond market is ending the year with a whimper - beset with anxieties over upcoming interest rate hikes and uncertainty over the incoming policies of the next US president.

With issuance down 15 per cent in the first 11 months of the year over the first 11 months of last year, the full-year volume may turn out to be the slowest since the decade began.

Returns are off their highs, but haven't been half bad, although this may not be apparent from news about the slew of defaults.

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New issuances for the first 11 months of this year came to S$18.6 billion from 98 issues - down 15 per cent from the first 11 months of last year, which was S$21.8 billion from 157 issues.

Issuance volume for the full year last year was S$22.8 billion.

The record year was 2012, with S$31.5 billion in issuances; a year later, it had plunged to S$19.9 billion.

The SGD bond market for this year looks like it will end up at close to 2013's new-issuance volume of just under S$20 billion, said Clifford Lee, DBS Bank's head of fixed income.

He offered 2 main reasons for the slow market: "The credit stress in the SGD bond market, although very much isolated to bonds issued by the offshore and marine sector, has seen more risk aversion among investors. The issuance volume of mid-cap issuers' bonds has correspondingly dropped.

"Traditional investment-grade issuers who could have issued in the SGD bond market were offered cheaper issuance options in other markets (such as in USD and HKD)."

Andrew Wong, OCBC Bank credit analyst, said another factor for the muted activity in 2016 is Singapore's weak economic outlook, which depressed performance in some key industry segments that issue bonds in SGD, namely property and financials.

Making things worse in 2016's final quarter - a traditionally slow period - was last month's unexpected victory by Donald Trump in the US presidential elections.

Todd Schubert, Bank of Singapore head of fixed-income research, said that the result of the election caused a re-pricing of bond risk globally, on the assumption that the Trump presidency would be marked by reflation caused by expansionary fiscal policies.

"Coupled with the potential for a Fed rate hike later this month, this has basically brought the SGD market, and indeed, bond markets globally, to a standstill," said Mr Schubert.

But although issuance has been slow, this year's performance hasn't been too bad overall.

The Singapore Fixed Income Index, which stood at 124.35 on Dec 2, is up almost 3 per cent in the year to date. The all-time high was 128.96 on Sept 8.

Some of this year's best performers have been perpetuals. The top performer is AusNet Services 5.5 per cent S$200 million bonds sold in March. It was quoted on Monday at around 107, down from its 108.07 high on Oct 9. At its current price, the yield has fallen to about 3.8 per cent.

Bonds are sold at 100 par. Bond yields fall when prices rise and vice versa. Perpetuals are hybrid bonds with no fixed maturity, though they typically have a call date when the issuer has the option to redeem the bond.

Strictly speaking, the AusNet deal is a long-tenure bond of 60.5 years with a call in 5.5 years, giving it perpetual-like features. That means the debt matures in September 2076, but it can be called or redeemed by the issuer in September 2021.

But for those hurt by the defaults, the bond market has lost its lustre.

Said Mr Schubert: "I would indeed say that the spate of defaults were the defining feature of the SGD market in 2016."

While the number of defaults was not large relative to the number of outstanding issues, for it to go from zero to around half a dozen is significant, he said.

Investors' losses amount to about S$1.1 billion, representing about 0.74 per cent of the S$149 billion outstanding SGD bonds, The Business Times reported last month.

The defaults highlighted the immaturity of the local bond market - the lack of liquidity in the secondary market.

Neel Gopalakrishnan, Credit Suisse's emerging-markets bond analyst, said: "The absence of meaningful secondary-market liquidity also hurt investors, as it was difficult to exit exposures to companies that had deteriorated fundamentally."

For those looking for a silver lining, the regulator has stepped up regulatory scrutiny and efforts to support the market.

Mr Schubert said the defaults proved to be a catalyst for tightened regulatory scrutiny, such as the mandatory disclosure of rebates on new issues and the impetus for a more robust legal framework for bankruptcies based on Western best practices.

The Monetary Authority of Singapore last month also said that Asian and Singapore bond issuers will get help to offset credit-rating fees, in an effort to raise the quality of bonds sold here.

Qualifying Asian issuances will be able to offset up to half the one-time issuance costs such as credit-rating fees.

For Singapore-dollar bonds, only rated issuances would be eligible under the Asian Bond Grant scheme.

As for 2017, there will be opportunities from refinancings.

Terence Lin, assistant director of bonds and portfolio management at fund researcher iFast, said: "We count S$14.45 billion of SGD bonds maturing in 2017, with another S$9.95 billion of bonds callable next year, for a total of S$24.4 billion which could be taken out of the market."

DBS's Mr Lee said that, with heightened expectation of rate hikes, 2017 promises more volatility.

"SGD-centric investors, however, remain cashed-up and will still need to invest, and they will continue to do so in the new year, during periods of market stability.

"In periods of low supply of new SGD bonds, investors may have to invest in non-SGD bonds and swap the proceeds back to SGD until supply returns," he said.

Devinda Paranathanthri, credit analyst with UBS Wealth Management, said that UBS prefers bank-subordinated bonds, larger developers, Singapore Reits and some overseas issuers.

Mr Lin said next year could be an interesting proposition for the brave investor, and also from a currency angle.

"Weak investor sentiment and the gross underperformance of SGD high yield in 2016 means the segment provides rich pickings for value-oriented investors," he said.

The SGD bond market may provide an interesting opportunity for global (US dollar-centric) investors who feel that the recent SGD sell-off is overdone, he said.

"A recovery in the SGD vis-à-vis the USD would provide currency upside from a USD investor's perspective, while domestic rates would also be expected to decline under such a situation, which would boost the prices of SGD bonds," he said.

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