Singapore bond market sizzles as interest rates slide

THE local bond market is sizzling as interest rates slide. The latest to join the rush are two bank issues on Wednesday which, by early afternoon, clinched orders of some S$2 billion.

United Overseas Bank is selling a new Basel III perpetual non-call 5 perpetual with indicative 4.25 per cent coupon. At noon, UOB had over S$1 billion orders.

Societe Generale is also issuing a new Basel III 10-year non-call 5 issue at 4.5 per cent indicative coupon, and had close to S$900 million orders by 2 pm.

Non-call 5 means that the issuer will not call or redeem the bonds before year 5.

"Today's a bit special because both are banks," said Terence Lin, assistant director, bonds and portfolio management, iFAST Corporation.

Mr Lin expects the investors for the bank bonds to include funds and banks. Most bond issues have been dominated by private bank investors.

On Tuesday, a sale by G8 Education's 3 year S$270 million 5.5 per cent took in S$500 million orders with private bank investors accounting for 98 per cent of the deal.

Interest rates have stabilised, and the USD/SGD is showing more stability, said Mr Lin.

Since March, the Singapore dollar has ranged between S$1.38 and S$1.34, recovering from the January low of S$1.44.

With investors piling in, bond prices have risen quite a bit.

The Markit iBoxx Singapore corporates return index hit a high of 116.0115, up 2 per cent year to date.

"The bond market has stabilised a fair bit and hence you see more supply coming out," said Clifford Lee, DBS Bank head of fixed income.

This trend should continue if the market continues to hold up, he added.

Interest rates have been sliding since the beginning of the year.

The five-year swap offer rate (SOR) stood at 2.6 per cent in January, fell to 2.1 per cent late last month and was this morning at 1.97 per cent, noted Mr Lin.

The two bank bonds are priced off the 5-year SOR.

Year-to-date SGD bond volumes are up 16 per cent to S$8.2 billion.

Investors still have a lot of liquidity to invest, and primary issuance has not been adequate enough to meet this demand, said Neel Gopalakrishnan, Credit Suisse Private Banking Asia Pacific, emerging markets bond analyst.

"Market conditions are favourable for high quality issuers as they can issue bonds at relatively low yields. In our opinion, current valuations of high grade bonds is relatively expensive, driven more by the limited supply of new bonds," he said.

Still, investors are discerning and the demand is for quality and familiar credits.

"Risk appetite is still low as credit quality is still a concern for investors in the emerging market space due to economic and political developments," said Mr Gopalakrishnan.

Mr Lee said that more investors are back in the market as seen in higher secondary market activities, and there are more constructive discussions on new deals.

"We are by no means out of the woods, markets are still choppy and cautious but the tone is much better than the start of the year and hence you see more deals surfacing," he said.

"But as you can see, the new issues are still primarily from repeat issuers and bigger companies."