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Choppy equity markets push investors to bonds

Small supply of new deals, stronger Sing $ among factors supporting bond market
Monday, September 15, 2014 - 12:09

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Different directions: As corporate bond and return indices rise, STI is down 2.42 per cent year to date. - FILE PHOTO

[SINGAPORE] Yield-hungry and risk-averse investors are buying up bonds as equity markets remain choppy.

The Markit iBoxx SGD corporate total return index hit 106.09 on Feb 25, an all-time high. The index measures bond prices and accumulated coupon payments.

The Thomson Reuters/SGX SFI corporate bond index, up 1.02 per cent year to date, has had its best start to the year since 2009. In contrast, the Straits Times Index (STI) is down 2.42 per cent year to date.

"Globally, there have recently been signs of reallocation back to fixed income - many institutions were underweight fixed income at the end of last year," said Geoff Howie, SGX market strategist.

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Choppy equity markets are spooking people, and investors are turning to bonds to provide a steady income, said Clifford Lee, DBS Bank head of fixed income.

"Not so long ago, bonds seemed a less interesting play . . . but investors are now saying they just want steady returns," said Mr Lee.

John Ng, head of research and product marketing at Bank of Singapore, said local bonds is "a resilient asset class due to its low market volatility, resulting from stable currency and better macro dynamics".

Concerns that interest rates will remain low have also been gaining currency.

Neel Gopalakrishnan, Credit Suisse private banking and wealth management emerging markets bond analyst, said fairly dovish comments from the US Federal Reserve and the latest round of soft economic data have reinforced the belief that short rates will stay low for the foreseeable future.

"Long-term interest rates have also moved down on the relatively weaker economic data in the US, which we believe is temporary. There is still a lot of liquidity with investors, which is being put to work given the low interest rate environment," he said.

Since the start of the year, speculation has been building that perhaps the Fed might reduce or halt its tapering of bond purchases due to weakening economic momentum, said Kelvin Tay, UBS wealth management regional chief investment officer.

"This in turn has resulted in both the 10-year US Treasury yields declining and higher gold prices, which have rebounded to US$1,343 per oz. The Singapore bonds market is responding to that, hence the strong movement recently," said Mr Tay.

Other factors supporting the bond market here include the small supply of new deals.

According to DBS' Mr Lee, year-to-date issuance has been 20 deals worth $3.68 billion, only slightly higher than 2013. For the same period last year, it was also 20 deals totalling $3.38 billion.

The record year for issuance was 2012, when some $30 billion worth of bonds were sold.

Bank of Singapore's Mr Ng believes investors are also cheered by the stronger Singapore unit.

The Sing dollar has reversed its depreciation trend from February 2014, which is also supportive of the Singapore bond market, he said.

"The majority of buyers are still private banking clients, local fund managers and banks. Specifically, private banking clients are major buyers for perpetual bonds such as recent Hyflux and Trafigura deals," he said.

"The rest were absorbed by fund managers and banks. A stronger currency outlook will attract more foreign investors' participation in this market, while local investors will continue to anchor the market," said Mr Ng.

The Sing dollar started to appreciate from late last month. It's currently around $1.26 to US$1. While it is flat year on year, the Sing dollar has appreciated about 1.56 per cent from its recent low of 1.28 as at Jan 23, 2014.

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