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Another exciting year ahead for bond markets

Demand remains strong, especially given the smaller number of deals this year
Monday, December 16, 2013 - 06:00
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Performance is expected to carry on next year as demand remains strong, especially given the smaller number of deals this year. - PHOTO: SPH

[SINGAPORE] If you have been following the experts who have been calling an overweight on developed markets, you would conclude that they are right as stock market punters here are licking their wounds. The Straits Times Index is down about 3 per cent from a year ago.

But bondholders - admittedly a much smaller bunch, including private bank types, and tend to be ignored by pundits - are likely to be swilling their champagne.

The Markit iBoxx SGD corporates index has been hitting new highs this month, though it eased a bit last Friday. The index is up around 3 per cent from a year earlier at 105.05, fuelled by investors' search for yield amid low interest rates.

Even long-tenured perpetuals such as Genting are off their September lows. Newly issued perpetuals - United Overseas Bank 4.75 per cent and DBS Group Holdings 4.7 per cent - are doing well, with yields falling to 4.47 and 4.48, respectively. When bond prices rise, their yields fall. "SGD corporate hybrids (perpetuals) have seen good interest in this more stable backdrop and private banks have topped up on solid names that offered attractive returns," said Alan Roch, Royal Bank of Scotland's head of bond syndicate, Asia.

Savings interest rates remain at rock bottom. DBS Bank pays 0.1 per cent for amounts above $1 million.

Performance is expected to carry on next year as demand remains strong, especially given the smaller number of deals this year.

"Levels of issuance have been lower this year versus 2012 and in our view there is significant pent-up demand that should ensure that deals that do come early next year will be well received," said Mr Roch.

The total value of SGD corporate bonds issued year-to-date is $19.6 billion, down 37 per cent from last year. "Most bond markets have rallied recently, it's not specific to Singapore," noted Marc Van de Walle, Bank of Singapore global head of products.

Singapore bonds are highly correlated to US bonds, and their high-yield category - equivalent to perpetuals - has not done badly either, said Mr Van de Walle. He also noted that data on fund outflows from the region, including Singapore, is on retail equity unit trusts. "Generally institutional investors buy bonds directly," he said.

The main factor driving bond markets everywhere is that interest rates have steadied after surging earlier in the year. The 10-year US Treasury started the year at around 1.8 per cent and shot up to 2.74 per cent on June 5.

The fear was that the rate would go through 3 per cent but it has hovered around 2.75-2.8 per cent. "The reason for the rally is simply because interest-rate volatility has gone down," said Mr Van de Walle.

Another explanation is that while investors think tapering, or the shrinking of easy money stimulus, is going to happen, their fear of its consequences has receded.

Put simply, tapering is not the same as hiking interest rates. Many are convinced that interest rates will remain low following tapering, taking their cues from Janet Yellen, the incoming chairman of the US Federal Reserve.

Ms Yellen, who will succeed Ben Bernanke as Fed chairman when his term expires on Jan 31, said that policy was likely to stay loose "long after" one of the thresholds has been crossed. "It is also important to note that the thresholds are not triggers," she said last month.

Mr Bernanke, too, noted that interest rates could stay at rock bottom "well after" the 6.5 per cent unemployment threshold was crossed.

"The Fed will most likely signal a push back in rate hike expectations by lowering the current unemployment threshold from 6.5 per cent to 6 per cent or even 5.5 per cent," said a note from the Bank of Singapore.

The US unemployment rate fell to a five-year low of 7 per cent last month.

For the local bond market, strong demand continues to exceed supply and bondbuyers tend to be domestic and long term. "SGD bonds have performed relatively well, mainly due to strong demand going after a limited supply of issuances," said Joyce Tan and Adeline Tan from UOB Asset Management Asia.

"In the secondary market, bond prices are being supported by asset managers pursuing limited investment-grade bonds as well as private banking clients seeking higher yields in the current low interest rate environment," they added.

"The market is still under-supplied," said Clifford Lee, DBS Bank head of fixed income.

At a recent meeting with investors in London, there was a general complaint that there were not enough bond deals to invest in, according to Mr Lee.

DBS continues to be the market leader of SGD bond deals in 2013, with a 31 per cent share. The bank has also ventured into foreign-currency bond deals, raking in more than $18 billion worth of issues this year. In the US dollar space, DBS handled 24 deals worth US$11.6 billion. Last year, it was 16 deals worth US$8.1 billion. Total value from 22 yuan deals for 2013 is CNH18.1 billion. In 2012, it was six issues worth CNH1.4 billion. CNH refers to offshore renminbi or yuan.

Next year promises a lot of excitement, in particular from Chinese companies which are encouraged to tap the offshore market as China steps up economic reforms.

"From a global standpoint, the renminbi is the most exciting bond market in Asia," said Mr Lee.

"China will drive the supply. CNH is having the best quarter in a long while, volumes are increasing," said RBS's Mr Roch. "Expect to see more Chinese state-owned enterprises issuance in the USD, including Chinese banks."

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