Private bank clients cushion SGD bonds slide

BONDS have fallen out of favour and yet investors seem to be hanging on. The reasons for falling bond prices are still the same as the past six months: rising interest rates, higher inflation and monetary-tightening programmes, as well as increased anxiety from a myriad other factors.

The Markit SGD corporates total-return index is back to last August levels. Another indicator, the Singapore Fixed Income Index is down 1.80 per cent, year to date.

Volume in the Singapore dollar bond market has fallen 38 per cent with S$8 billion raised, according to Bloomberg.

With less than two weeks to the end of the month, June has only seen two issues sold worth a measly S$215 million.

Bonds globally are in a bear market grip; US dollar bonds, especially the longer dated ones have traded down as well.

Actually the entire regional markets are in technical sell-off mode, so in comparison, the SGD bond prices are more resilient, said Clifford Lee, DBS Bank head of fixed income. The upward trend in rates is an immediate influence but the general nervousness in the credit market is a bigger cause, he said.

Generally when interest rates go up, bond prices fall and vice versa.

Looking at the 42 bonds sold this year, and their price performance, investors are not panicking.

Only 12 bonds are trading above water, but barely so - none have breached 101, according to their prices quoted on June 14 on Bloomberg. Bonds are sold at 100 par.

To be clear, while the majority are below water, they are not doing too badly with many of their prices ranging from 97 to 99 plus.

Perpetuals didn't do too badly considering that the collapse in prices and suspension of Hyflux perpetuals in May might have caused some anxiety. The worst performing perpetual is Frasers Property Treasury S$300 million 4.38 per cent; it was quoted at 93.741.

Fixed income bankers have said that the Hyflux event is idiosyncratic, meaning it's a company specific credit issue which should not necessarily result in a bad reputation for perpetuals. Hyflux in May applied for court-supervised reorganisation to try to fix its financial problems.

In fact, defying perception that perpetuals might be regarded as more risky, Cache Logistics Trust S$100 million 5.5 per cent perps which was sold in January is among the top performers. It was quoted at 100.126. The issuer owns logistics warehouse properties in Singapore, China and Australia.

One fixed income banker noted that the Cache perp issue was a small one and well-placed.

The small SGD bond market is skewed towards the private banking segment, made up usually of long-term holders.

That means modestly sized issues - which would be typical of deals done by small companies will be held tightly.

It's not that the investors do not want to sell, it's more like they can't sell because they don't see a replacement.

Other bonds which are in the money are the high yielders, such as Heeton S$118 million 6.08 per cent, mm2 Asia S$50 million 7 per cent, Fragrance Group S$125 million 6.125 per cent and Valuemax Group S$50 millon 5.1 per cent. These have short three-year maturities.

Ultimately, pricing determines the performance of the issue in the secondary market, noted Wong Hong Wei, OCBC Bank credit analyst.

"The small companies or first-time issuers with high coupons likely came in with a generous spread (that was wider than needed) to attract investors, hence they trade above par," he said. For example, Cache perps' 5.5 per cent coupon rate is amongst the highest in the Singapore perp space, he said.

The biggest deals - two of three bonds sold by the HDB and two by the Land Transport Authority of Singapore - have slipped marginally or leaked - in fixed income parlance.

HDB is tops

The year's top performer bond is HDB's S$500 million 3.08 per cent due 2030 sold last month. Quoted at 100.784, the 12-year bonds is also HDB's longest tenure of the three sold this year.

In January and March, HDB had sold two issues - S$515 million 10-year and S$600 million 5-year respectively. These two are selling at a loss, indicative quotes are at 95.302 and 98.967 respectively.

HDB bonds are rated Aaa by Moody's Investors Service.

Government agencies' bonds naturally pay the lowest coupons given their parentage.

Does this mean SGD investors' behaviour is less than conventional in that they tend to value bonds sold by smaller companies which would be regarded as being riskier over safer issuers such as government bodies or bigger companies?

Devinda Paranthanthri, Asian credit strategist at UBS Global Wealth Management, said some bonds have lower coupons and longer duration, which make them more sensitive to interest rate changes.

"This is not a result of unconventional behaviour by investors," he argued.

Bonds of the smaller companies are relatively illiquid and prices have not moved much in the recent months, he said.

Despite higher interest rates, SGD perpetual holders are mostly hold-to-maturity type investors, and the lack of trading has resulted in muted price action. This compares favourably to the USD market where perpetuals have underperformed significantly, said Mr Paranthanthri.

SGD investors are not so unconventional after all.