Is the Singapore-dollar bond market getting frothy?

LAST week's sterling reception given to HSBC's debut in the local bond market was yet another sign of the liquidity splashing around.

To recap, yield-hungry private- bank and instituitional investors pushed the order books to above S$7 billion for HSBC's maiden S$1 billion 4.7 per cent perpetual issue.

At S$1 billion, it is the largest Singapore dollar (SGD) bond transaction from a corporate or financial institution since 2012.

The S$7 billion orderbook was probably also the largest ever received for a SGD bond.

HSBC's perpetual issue has a non-call 5 feature, which means the bank has the option to redeem the bonds after five years. The first call is on June 8, 2022, and every five years thereafter. If the issue is not redeemed, there is no step-up from the initial margin. The interest rate will be reset at the five-year SOR, or swap offer rate, every five years from first call.

The sizzling demand was due to a few factors, not least HSBC's pedigree. It is the first ever Additional Tier 1 and G-SIB or globally systemically important bank to issue in the SGD market. HSBC is among the 30 G-SIBs, also known as too-big-to-fail banks, identified by The Financial Stability Board, in consultation with the Basel Committee on Banking Supervision.

Also, the year-to-date decline in swap offer rates likely had investors salivating over the almost 5 per cent coupon. The initial price guidance was in fact in the 5 per cent area, before settling lower at 4.7 per cent due to the mega demand.

The five-year SOR has declined 59.5 basis points, noted Benson Tay, iFast Corp bond analyst, in a brief before the perpetuals were sold.

Bond investors are generally doing pretty well, and it's been pretty much a global phenomenon with interest rates expected to remain low for long. The Markit SGD corporates total-return index hit yet another high at 121.9606 on June 6, returning 3.8 per cent year to date.

Of the 12 perpetuals sold over the past 18 months, only one is in the red. Returns of perpetuals since launch have been as high as 8.5 per cent.

The odd one out is Hyflux 6 per cent though it has recovered some of its loss. Sold in May 2016, the perpetuals fell to a heart-stopping 90.25 in December before it u-turned and was last quoted at 98.94 on Wednesday.

Bonds are sold at 100 par.

It's not only perpetuals which have done well, regular bonds too have delivered.

According to iFast, as of May 31, 2017, new SGD bonds have seen a 0.6 per cent average price appreciation (since launch, excluding accrued interest), suggesting that investors in new bond issues have generally been rewarded with capital gains so far in 2017.

Even HDB's five-year 2.2325 per cent bonds have returned 1.7 per cent since its February launch.

Returns have primarily been driven by the declines in domestic SGD rates so far in 2017 - using the five-year swap offer rate as a guide, and the weak US dollar (USD). The greenback has fallen almost 5 per cent against the SGD since the beginning of the year.

Not to be a spoilsport but maybe it is time to think about how long the party can last. Is the bond market turning frothy?

According to the five-year-old Markit SGD corporates total-return index which started on June 30, 2012, SGD bonds have marched steadily north with a few short blips, amid a low interest rate environment.

Instead of trying to guess when or where the negative events could come from to dent the party, perhaps the risk averse should recall the purpose of investing in fixed income - which has always been about the income.

When investing in bonds, stick to strong credits. Try to resist the temptation of leveraging - which is hard given the cheap money on offer.

To paraphrase a banker, mistakes are usually made during good times.

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