Low interest rates should make 2020 another good year for SGD bond market

Singapore

FIXED-income bankers are looking forward to another good year, with interest rates likely to remain low, while issuers have some refinancing to do as bonds mature or become callable in 2020.

Sean Henderson, HSBC's co-head for debt capital markets in the Asia-Pacific, said: "While the market is quietening down into the year end, we expect conditions to remain strong early in 2020 should interest rates remain stable."

The local dollar bond market is ending 2019 with a flourish, with falling interest rates leading to several chunky deals in the past two months, including HDB's S$700 million bond.

As the 5-/10-/30-year swap offer rates fell by 50 to 60 basis points through 2019, investors' search for yield resulted in higher volumes, making this year the third best ever.

Issuance volume for the market reached S$24.05 billion, up 8.4 per cent over 2018, making 2019 the third highest behind 2012's S$31.6 billion and 2017's S$24.9 billion.

Next year should continue in the same vein - as long as interest rates stay benign. Clifford Lee, DBS Bank's head of fixed income, said: "Next year, expect a healthy bit of refinancing." In 2020, about S$25 billion of Singapore dollar bonds are estimated to mature or become callable, against S$18 billion in 2019.

But investors need more than just low interest rates; they can get skittish and head for the hills if markets are hit by volatility or negative news.

The US-China trade war and Brexit worries have taken a back seat for now, but are not far from investors' minds, said Tan Kee Phong, OCBC's head of capital markets, global investment banking. There is also the risk that the political situation on the Korean peninsula might flare up next year, he said.

"As long as market conditions are stable, investors would have to put their funds to work," he said.

The heavy hitters this year were the Housing & Development Board and the Land Transport Authority of Singapore. HDB's S$700 million five-year deal at 1.75 per cent last month was its sixth issue for 2019, making a total of S$3.5 billion, against the S$3.515 billion raised in 2018.

The LTA did only two deals this year, but they were big ones - S$1.5 billion in January and S$1.4 billion in May - S$2.9 billion in all. (In 2018, the agency sold four bonds worth S$4 billion.)

LTA's bonds had the market's longest tenors, at 35 and 40 years. HDB bonds range from five to 15 years. DBS' Mr Lee said HDB issues five to six times a year, raising S$3 to 4 billion. "They fund on project basis, so the requirements are shortish," he said of the agency's shorter tenors, unlike LTA's much longer-dated bonds.

Referring to the lower amount of S$2.9 billion the LTA raised this year against 2018's S$4 billion, Mr Lee said LTA took a two-year hiatus in 2016 and 2017; before that, it was active in 2015, tapping the market for S$2.5 billion that year with four issues.

Investor demand for these two government agencies' bonds is becoming broader-based, which is great, he said. Demand now comes from foreign institutional investors such as fund managers and banks, broadening from primarily Singapore-based investors, he said.

The local bond market has done well, but is lagging the much bigger Asia ex-Japan G3 market, which has grown at a much faster 28 per cent to US$334 billion. G3 refers to the US$, the euro and the yen.

Mr Lee said: "The Singapore market is slower, swings are more subtle." In 2018, it fell only 11 per cent against a sharper 19 per cent contraction for the Asia ex-Japan market.

For DBS, making a mark in the Asia ex-Japan G3 market remains a focus, he said. The bank's market share puts it in 15th place, despite doing more transactions. DBS was in 134 deals worth US$8.3 billion this year, against 101 worth US$6.5 billion in 2018.

The strategy is not only to raise the volume, but also to snag higher-quality or investment-grade deals, said Mr Lee. Some US dollar deals of Singapore companies led by DBS in 2019 include Singapore Power's US$600 million issue in February and PSA International's US$500 million bond in August.