SGD bond issues jump 147% in July, but YTD figure still weak

Singapore

THE Singapore dollar bond market drought may be ending if July's activity is anything to go by - volume sold more than doubled due to a big boost from government-linked issues, including a rare 40-year issue by the Land Transport Authority (LTA).

July saw volume reach S$2.8 billion, 147 per cent higher than a year ago - and over six times the measly S$445 million in June - with 90 per cent coming from three government-linked issuers.

For the first seven months of 2018, issuance totalled S$11.1 billion, down 23.1 per cent from a year ago. Total 2017 volume was a record S$24.9 billion.

Two bumper deals - from the LTA and HDB - in July helped make it the best month since March when nine bonds worth S$3.2 billion were sold.

The LTA sold its S$1.5 billion 40-year bond - its fourth bond this year - at 3.45 per cent, which was also the biggest and longest dated SGD bond so far this year. With four deals totalling S$3 billion, LTA overtook the HDB as the most prolific SGD bond issuer.

LTA bonds are unrated and issued under its S$12 billion multicurrency medium-term note programme.

Its uncommon 40-year deal is only the second in the local bond market. The first was issued in July 2010 when Temasek Holdings sold a trailblazing 40-year S$1 billion bond.

"LTA has a credit profile to command interest in that space, it did a great job in tapping 40-year investor money," said Clifford Lee, DBS Bank head of fixed income.

The interest from institutional investors was so strong that the deal got upsized from an initial S$1 billion to S$1.5 billion, said Mr Lee.

It was well distributed between insurance companies and asset managers, he said.

HDB also sold its fourth bond for the year in July - S$700 million five-year at 2.42 per cent.

Year to date the nation's public housing body has raised a total of S$2.315 billion, issued under its S$32 billion multicurrency medium-term note programme. They are rated Aaa by Moody's Investors Service.

In 2016 and 2017, the HDB sold S$3.32 billion and S$5.275 billion worth of bonds respectively.

The other government agency issuer last month was PUB which raised S$300 million 15-year at 3.01 per cent.

The fact that July's volume was overwhelmingly due to government-linked entities shows that the market is not quite out of the woods, though investors are cautiously nibbling in the secondary market.

The Markit SGD corporates total-return index has rebounded from this year's low of 122.9874 on May 25 to 124.0281 on Aug 2. The high was 124.9806 on Jan 16.

Said Devinda Paranathanthri, Asian credit strategist, UBS Global Wealth Management: "Bond prices have already corrected in response to rising interest rates since the start of the year, and investors have taken that into consideration."

Noting that corporate primary issuance activity remains soft, Ezien Hoo, OCBC Bank credit analyst, said the change in sentiment is in the secondary market, especially since the second half of July 2018, "though prices of most issues remain lower than in the earlier part of the year".

"This is mainly for high-grade and selected household names only and not broad-based bullishness over SGD bonds,"she said.

Investors are flush and recent maturity of DBS and UOB papers totalling S$2.15 billion is increasing the pressure to put cash to work, said Ms Hoo.

Including the lack of new supply in the SGD market, there is encouraging buying interest in the secondary market, she said, noting also some bottom fishing.

"We are selectively turning overweight on certain issues," she said. These include perps issued by Julius Baer, Hong Fok Corp's 4.75 per cent due 2019 and City Dev's 2.93 per cent due 2021.

Chung Shaw Bee, UOB head of regional and Singapore wealth management, said that in the current rising interest rate environment, coupled with uncertain market conditions, investors looking to grow their fixed income cash flow should continue to be selective and focus on those issuances with sound fundamentals and adequate liquidity.

"With the long end of the yield curve staying flat, we would also advise investors to find value in the short- to medium-ends of the yield curve while managing their duration risks," she said.

"Investors who can withstand some valuation volatility can include select perpetuals in their portfolios. Investors may wish to consider perpetuals that have coupon resets on their first callable dates, and a high coupon reset spread or coupon step-ups," said UBS' Mr Paranathanthri.

But as the US dollar continues to rally and given that more interest rate hikes are likely, investors are turning to USD bonds, it seems. The currency impact is making USD bonds relatively attractive on a broad basis, said Ms Hoo. "As such, we have seen solid demand for USD paper and weaker demand for SGD paper for investors that are not restricted by currency. For investors that are SGD-focused, they are then swapping these cashflows back into SGD," she said.

"So the impact on the SGD bond market is relatively negative," she said.

Neo Teng Hwee, UOB chief investment officer and head of investment products and solutions, said the bank's forecast is that the Singapore dollar will weaken to 1.41 against the US dollar by the second quarter of 2019 from 1.37 now.

"As our clients look at asset allocation from a global perspective, SGD-denominated bonds will be less attractive compared with USD-denominated bonds," said Mr Neo.