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Singapore Q3 bond market stuns with quadrupling of issue value

OCBC, DBS, HSBC issued billions in perps; but robust performance may not hold in final quarter as banks unlikely to repeat similar capital raising

The Singapore dollar bond market made a remarkable recovery in Q3 following an abysmal show in the April-to-June quarter, when financial markets were whipsawed by trade-war fears and rate-hike uncertainty.


THE Singapore dollar bond market made a remarkable recovery in Q3 following an abysmal show in the April-to-June quarter, when financial markets were whipsawed by trade-war fears and rate-hike uncertainty.

September was particularly strong, with S$3.7 billion in deals, mainly from banks and government entities; it was also the best month since the S$3.8 billion printed in October 2017.

Also notable in Q3 was the high number of foreign issuers who tapped the SGD market for favourable swap rates.

For the July-to-September quarter, Singapore dollar bond issuance rose a strong 73 per cent to S$8.8 billion, in contrast to a dismal Q2, when volumes plunged by about the same magnitude to S$2.2 billion.

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The recovery in Q3 brought the year-to-date issuance to S$17 billion, down by 7.1 per cent.

The stronger market in June-to-August came on the back of declining yields in long-term Singapore interest rates. The 10-year swap offer rate (SOR) fell from 2.7 to 2.45. It has since moved up to 2.65 per cent.

The lack of supply in SGD bonds earlier in the year meant that new issues in Q3 were snapped up when they came to market, especially since they came from familiar high-grade names.

Bank perpetuals made a comeback in Q3. OCBC, DBS and HSBC issued perpetuals which were lapped up by investors.

OCBC's S$1 billion perp deal in August got a hot reception. Final orders exceeded S$3 billion.

DBS followed with its S$1 billion perp deal in early September. Due to sizzling demand, the perps were priced at 3.98 per cent, down from the initial price guidance of 4.375 per cent. The deal garnered orders of over S$4 billion.

Twelve days later, HSBC sold its S$750 million perps at 5 per cent; it garnered about S$1.4 billion orders.

Government entities such as HDB continued to tap the market. HDB sold its fifth bond this year worth S$700 million in September. All in, its five bonds have totalled S$3.015 billion, making it the largest SGD issuer.

Not far behind is the Land Transport Authority (LTA) of Singapore. In July, it sold S$1.5 billion worth of 40-year bonds - its fourth bond for the year - at 3.45 per cent. This is so far the biggest and longest-dated SGD bond this year. The four deals totalled S$3 billion.

The LTA deals were expected, given the ramp-up in infrastructure spending, said Santosh Bukitgar, emerging markets' fixed-income analyst at Credit Suisse private banking research.

"The bonds issued by quasi-sovereign entities were expected as the government had announced its plan to raise debt for infrastructure development per the annual budget," he said.

But as the market heads into the final quarter of 2018, it is not clear if Q3's performance will be repeated.

Sean Henderson, HSBC's co-head of debt capital markets in the Asia-Pacific, said: "Since August, rates have risen about 20 basis points and supply has picked up, so the market is quite as exuberant as it was back then, but it is still very much open for better credits."

Todd Schubert, Bank of Singapore's head of fixed-income research, noted the high number of opportunistic foreign issuers in Q3.

Of the 31 SGD deals printed in the third quarter, roughly 40 per cent were from foreign issuers who took advantage of favourable SGD swap rates versus their own respective currencies, he said.

Mr Schubert said: "To the extent that ongoing trade issues contribute to a continuation of dollar strength and emerging market currency volatility, we could see periods where swapping into SGD makes sense for foreign issuers and results in another quarter of brisk issuance.

"Outside of this, we would expect issuance from Singapore banks, statutory boards and government-related entities to be fairly modest."

Devinda Paranthanthri, Asian credit strategist, UBS Global Wealth Management, added that issuances of local and overseas banks were driven by capital requirements of the banks involved and "we do not expect them to be repeated in Q4".

Looking at the bigger picture, Clifford Lee, DBS Bank head of fixed income, said there are some megatrends driving bond markets.

Infrastructure bonds are going to be a big theme; another is ESG-linked bonds, he added. ESG or environmental, social and governance bonds are increasingly in demand by both issuers and investors to support projects which have a positive impact.

"Singapore is positioning itself as an infrastructure hub and surrounding countries' planners have reached out," said Mr Lee.

While the growth and development of countries in the region are part of the megatrends that will drive bond markets, choppiness is also par for the course along the way because of geopolitical issues, he said.

And there is China, he said.

China accounts for more than half of the Asia excluding Japan market; if Hong Kong is included, it would be 70 per cent, he said.

"What happens in China impacts rest of Asia," said Mr Lee.

Some defaults and deleveraging in the early part of the year had spooked markets, he recalled. This eased off from August. "We see confidence returning. Key factors behind the return in confidence include China's State Council announcing a softer stance towards the economy in July, with less talk on aggressive deleveraging plans and more talk on increased investment spending.

"Pick-up in activity in Q4 is promising, and if 2018's Asian dollar bond issuance could potentially see a gentler decline of 10 per cent year-on-year, it would be considered a good recovery from a challenging start to the year," he said.

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