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[SINGAPORE] It was obvious that the tightening of US monetary policy would lead to a rise in interest rates.
It was obvious that the improving US economy would lead to capital flight from emerging markets and from bonds.
It was obvious that this was to be the year that companies would issue stock instead of bonds.
It was obviously wrong.
Debt issuance beat initial forecasts to turn in a solid second quarter and first half of 2014, as a benign rates environment and strong local currencies kept the bond party in Singapore and the region going longer than expected.
"At the beginning of the year, the fear about the sudden interest rate hike was more rampant," DBS head of fixed income Clifford Lee said.
"They started putting on trades to favour shorter tenures, and the entire market was proven wrong, so now people have to reverse the trade."
Singapore-domiciled companies raised US$6.7 billion from debt capital markets during the April-to-June period, almost double the US$3.5 billion raised a year earlier, according to preliminary data from Thomson Reuters. Year-to-date, debt issuance from Singapore issuers rose 8.3 per cent year-on-year to US$12.1 billion.
In terms of all Singapore-dollar issuance, second-quarter proceeds rose 18.6 per cent year-on-year to S$4.7 billion. That brought the first-half total to S$10.9 billion, a 21.4 per cent increase. Singapore outpaced the region in the first half, with South-east Asian aggregate volume up 16.1 per cent at US$32 billion, said Thomson Reuters. "It's very much a record second quarter if you look at it on a US-dollar basis (in Asia)," ANZ head of Asia debt capital markets Jimmy Choi said.
Shows of strength were all around.
Hainan Airlines sold 1.7 billion yuan (S$341.5 million) of three-year offshore renminbi (RMB) bonds at a 6.25 per cent coupon last month to become the first corporate "Lion City" bond to be cleared and deposited in Singapore. Mr Lee said that investors in the offshore RMB space are looking more closely at credit now that the currency appreciation theme is no longer as assured.
"You don't have that speculation, so that market is on more fundamentally solid ground," he said.
Perpetuals also made a comeback, with Trafigura Beheer BV selling S$200 million of 7.5 per cent step-up perpetual securities. Elsewhere in the region, Hong Kong-listed Far East Horizon sold US$200 million of perpetuals, while Thailand's PTT Exploration and Production sold US$1 billion of perpetuals a week ago, a feat considering the country's recent coup.
"It just goes to show how much liquidity there is in the market right now, with investors looking to move down the capital structure to pick up slightly more yield," said Simon Page, head of debt capital markets in South-east Asia at JP Morgan. "It's a reflection of the increase in liquidity, low interest rates, and it comes down to people's rate expectations."
That interest rates did not go up as much as expected emboldened some companies to do some opportunistic fundraising.
"Companies are taking as much long duration as they can," Mr Choi said.
The banks also helped to boost issuance. "What's really driven the three bank-capital trades has been the strong market and the low interest rates," Mr Page said. "Both OCBC and UOB have old-style Tier 2 bonds maturing later this year and so they have been opportunistic in taking advantage of strong demand and low spreads to issue Basel III-compliant Tier 2's."
The bankers said that they were cautiously optimistic that the momentum of the first half of 2014 will continue into the second.
"Our view is that over time, as you probably know, rates will have to trend upwards," Mr Choi said. "Rates will be rangebound, spreads will come in minimally tighter because monetary policy is very accommodative . . . The biggest headline risk is geopolitical risk."