SGD bonds looking bright as economic outlook dims

Singapore

THE Singapore dollar bond market rally is showing no sign of fatigue as investors' risk aversion remains high.

The strong performance of local bonds is in line with a global rally since late December on the increasing belief that the economic outlook is dim.

The Markit SGD corporates total-return index stood at 127.1723 on March 27 according to Bloomberg.

In the current climate, it's mainly familiar credits as well as government linked issues which have been able to tap the market.

A case in point was the Singapore Airlines bond sold last week which was aimed at retail investors. The 3.03 per cent five-year bond issue was upsized to S$750 million from S$500 million, after attracting over S$2.2 billion in orders.

Some might quibble that 3.03 per cent was not that wonderful for holding 5-year bonds. But the strong subscription "is a good validation of the price", said Clifford Lee, DBS Bank head of fixed income.

Said Samuel Chan, Standard Chartered Bank head of capital markets, Singapore: "The fact that SIA's 5-year retail bond was upsized from S$500 million to S$750 million shows that investor confidence in the credit is strong, and there is a positive take on market sentiment."

The price of the SIA bonds has since risen; they were quoted at 100.011 on March 27. Bonds are sold at 100 par.

Longer tenors are especially in demand as investors seem to have given up hope on seeing a recovery in interest rates anytime soon.

The Land Transport Authority's 40-year S$1.5 billion 3.380 per cent bonds have shot to 102.072; they were launched in January.

HDB's 10-year S$600 million 2.675 per cent bonds, also sold in January, rose to 101.558 on March 27 before easing to 101.275 on March 28.

ST Telemedia's S$350 million 5 per cent perpetual issue has soared to 103.743. STT is wholly owned by Temasek Holdings.

"Demand has turned very strong since last year for triple A or government equivalent issues," said Ang Chung Yuh, iFast senior fixed income analyst.

Mr Ang said US Treasuries have also done well on pessimistic sentiment that the global economic outlook is not promising. This was reinforced by the US Fed in its recent message which was dramatically dovish.

Since the US Federal Reserve surprised markets on March 20, signalling just one hike in 2020, compared to three (two in 2019 and one in 2020) back in December, the US 10-year Treasury has risen strongly.

As a result, the yield on the US 10-year Treasury slumped to 2.377 per cent on March 28 from last November's high of 3.232 per cent, as the Fed move was regarded as cushioning for a slowdown of the world's biggest economy, and perhaps helping to stave off a recession as well. Bond yields fall when prices rise.

In the meantime, risk-averse Singapore bond investors are hard put for a supply of new deals as issuance volume stays muted due to widening credit spreads, which puts off issuers as they can turn to relatively cheaper bank loans.

Year-to-March 28, issuance volume of S$6.1 billion is flat.

Credit spreads have widened significantly compared to 2017, said Mr Ang. "I think this might have deterred many weaker Singapore credits from tapping the bond market, and turned them to bank financing instead," he said.

"Unlike the overall Asian credit market, we seldom see Singaporean corporates raising debt at rates above 7 per cent," he said. "This could be partly attributable to the generally lower return on invested capital of Singapore corporates relative to the other markets. As spreads widen beyond a certain threshold, it no longer makes financial sense for many companies to raise bond financing."

Bankers note that some Singapore corporates are turning to the bigger and deeper US dollar market.

Last week CapitaLand Mall Trust (CMT) printed 10-year US$300 million 3.609 per cent bonds.

Sean Henderson, HSBC co-head of debt capital markets Asia Pacific, thinks the local SGD bond market in terms of new deals might begin to improve as Q1 results season gets underway.

"It is worth noting in the context of Q1 2019 that a number of issuers haven't been able to issue yet due to results season, so we expect April to be particularly busy compared to a tough month in 2018 which faced rising rates and emerging market volatility."

And in the bigger USD market, low interest rates did bring on more deals across the spectrum.

The Fed's dovish tone and low underlying rates have been positive for primary markets. "Risk-on" markets have been on display in the past few months, with issuers across the high grade and high yield spectrum accessing the market and issuing across senior and perpetual instruments, said Mr Henderson.

"However the headwinds around an economic slowdown, especially in recent weeks, have begun to creep in and cause some volatility in the markets. Having said that, the pipeline remains strong and we would expect continued supply in this space."

DBS' Mr Lee said both SGD investors and issuers need time to process the sudden change in interest rate outlook. He noted that high yield names are doing well in the USD market, accounting for 60 per cent of new deals so far this year.

"If the trend persists in the USD, SGD investors should be more confident," said Mr Lee.