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Singapore bond market to stay 'firm' this year, credit spreads may tighten: OCBC

THE Singapore dollar (SGD) credit market appears to be maintaining a “positive tone” for this year, after a “firm” conclusion to 2019 with no defaults and a larger aggregate issuance size, according to OCBC Bank’s credit research team.

“While the uncertainties are not completely in the rear view, we can possibly expect another strong January as issuers take advantage of this issuance window following a joyous year-end with minimal negative views,” the analysts wrote in their Singapore credit outlook report released on Monday.

This year, there might be more bonds issued by statutory boards and government-linked names, due to Singapore’s climate change push as announced by Prime Minister Lee Hsien Loong during the National Day Rally address, OCBC said. The government is considering the issuance of state bonds to partly fund the S$100 billion it could take to tackle rising sea levels over the next century.

2020 is also set to be a relatively heavy maturity year. There will be some S$14.6 billion of corporate bonds maturing this year, excluding perpetual securities facing their first call dates and callable bonds, which make up 13.5 per cent of the total outstanding SGD corporate bonds. In comparison, 2019 saw S$13.6 billion of bonds mature, while 2021 will have just S$8.7 billion of bonds coming due.

The credit market’s fundamental and technical drivers are at a delicate balance this year, according to OCBC. On the one hand, end-investor liquidity will stay high while the macroeconomic outlook remains supportive, notwithstanding unresolved event risks such as Brexit and the Sino-US trade talks, the analysts wrote.

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“On the other hand, credit valuations remain stretched with technicals running ahead of fundamentals in our view,” they added.

Based on fundamentals, credit spreads going into the first half of 2020 should stabilise, although investors are still bullish which will likely lead to market technicals prevailing and causing credit spreads to narrow further, the analysts said. A credit spread is the difference in yield between two bonds of similar maturity but different credit quality, such as a 10-year government bond versus a 10-year corporate bond.

The OCBC research team described 2019 as a bumper year for both issuance volumes and credit spreads, which continued to tighten in the secondary market.

However, investors were still selective due to ongoing geopolitical event risks. This meant that “while everyone wanted to jump in the water, investors were happy staying in the shallow end first, in case an unexpected wave washed them out to sea”, the analysts wrote.

New issuances of SGD bonds, including those by the Housing Development Board and the Land Transport Authority, increased 11.9 per cent to total S$24.1 billion across 89 issues last year, up from S$21.5 billion across 92 issues in 2018.

This higher volume of issuances was mainly driven by lower costs of borrowing, with the US Federal Reserve cutting its benchmark rates by 25 basis points (bps) three times.

“Overall, global risk sentiments appear to have improved significantly, and fears of recession appear to be behind us with a sharp steepening of the yield curve in December 2019,” the analysts wrote.

Given the drop in interest rates and the pursuit of yield, there was a significant shift towards longer-tenor bonds and perps last year.

Issuances at the longer end of the curve – perps and bonds with tenors above 15 years – comprised 42.4 per cent of total SGD issuances in 2019. Meanwhile, short-dated bonds with tenors of two to five years shrank to make up 33.6 per cent of total issuances, down from 44.6 per cent in 2018.

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