Higher-yielding bond alternatives – with some guardrails for risk

THE days of low interest rates may be well and truly over. Global interest rates have risen substantially as central banks hiked them to combat inflation. So far, the US Federal Reserve had raised rates six times this year for a total of 350 basis points (“bps”) on their fed funds rate – 0.5 per cent in 2021 to 4 per cent in November 2022. The fed funds rate, the key interest rate for the US, determines the overnight borrowing rate among banks.

Bond yields are positively related to interest rates. When interest rates rise, bond yields rise in tandem. This is because investors would require higher yields to hold the bonds.

In Singapore, the Singapore Overnight Rate Average (SORA) has also risen in the year to date, from 0.14 per cent in January this year to 3.53 per cent on Nov 18. As a result, the yield on Singapore Government Securities (SGS) has risen. As at Nov 18, SGS bonds are yielding 3.03 per cent for the two-year issuances, and 3.11 per cent for the 10-year bonds. The yield for bonds of shorter tenor, such as SGS Treasury bills, stands at 3.98 per cent.

Investor interest in government securities has risen. In the most recent (December) tranche of the Singapore Savings Bonds (SSB), the 10-year average return rate hit a record high of 3.47 per cent. The previous November tranche was 2.4 times oversubscribed as investors poured S$2.2 billion into SSBs, more than the allocation amount of S$900 million. T-bills have also garnered substantial interest. The latest six-month T-bill auction attracted a record 92,000 bids totalling S$14.2 billion. The issuance was 3.2 times oversubscribed for a total allotment of S$4.5 billion.

These are other A-rated alternatives that may provide some yield pick-up over the SGS:

Quasi-sovereign bonds

Quasi-sovereign entities are those which have the support of the government, such as government agencies. Examples of quasi-sovereign bonds include bonds from the Housing Development Board and Land Transport Authority.

As an example of government support, the HDB in its financial year ending Mar 31, 2022 recorded a net deficit of S$4.3 billion before government grants and taxation. About S$4.4 billion in government grants was provided to cover the deficit. Since 1960, the total cumulative grant from the Singapore government has amounted to S$43 billion. After including government grants, net surplus for the year was S$57.1 million, and total comprehensive income for the year was S$57.5 million.

Bonds such as the LTAZSP 2.900% 19Jun2023 Qsov (SGD) and HDBSP 2.420% 24Jul2023 Qsov (SGD) are currently offering an indicative yield to maturity of 4.25 per cent and 4.21 per cent, respectively, which provides some yield pick-up over the SGS T-bills. HDB also has an “AAA” rating from Fitch, which is equivalent to the rating of SGS bonds due to the strong support from the Singapore government.

Retail bonds

Retail bonds can be accessed at a lower investment amount; the minimum nominal amount required is just S$1,000. In the Sing dollar retail space, bonds from Astrea and Temasek have earned investment-grade ratings, and quoted at a spread above the SGS bonds.

Astrea private equity bonds are asset-backed securities backed by cash flows from PE Funds invested by Azalea Asset Management. Azalea is a wholly-owned subsidiary of Seviora, and indirectly owned by Temasek Holdings. It has its own independent board and management team.

Astrea has been a regular issuer in the Sing dollar retail bond market. So far, Azalea has issued a total of seven retail bonds, the latest of which was Astrea 7.

The ASTLC 3.850% 20Jun2029 Corp (SGD) - Class A-1 – Retail (Astrea V) offers an indicative yield-to-next-call of 4.17 per cent. It has an early call date, Jun 24, 2024, when Azalea is obligated to redeem the Astrea V bonds if the total balance in its reserve account is sufficient to redeem the full principal amount of its Class A-1 bonds. As of Jun 30, 2022, the reserve account was S$380 million, which was sufficient to redeem the full outstanding amount of S$315 million of the Astrea V class A-1 bonds in full. On top of that, Astrea V also met its performance threshold on Dec 20, 2021. This means that a “bonus redemption premium” of 0.50 per cent is to be paid to Class A-1 Bondholders upon redemption.

The ASTLC 3.850% 20Jun2029 Corp (SGD) - Class A-1 – Retail has a credit rating of A+ from Standard and Poor (S&P), which is a few notches below the AAA rating of SGS bonds. However, as the reserve account to redeem the class A-1 bonds is sufficient, we think the Astrea V bonds are a good option over the SGS bonds.

Corporate bonds

Corporate bonds have a higher risk profile than SGS bonds, as the likelihood of companies defaulting on their debt obligations is higher. However, there are some corporate bonds with some structural safeguards that could protect investors.

One example is the 3.25 per cent social bonds offered by First REIT. The FIRTSP 3.250% 07Apr2027 Corp (SGD) is guaranteed by the Credit Guarantee and Investment Facility (CGIF), which is a trust fund of the Asian Development Bank. The guarantor is rated AA (stable) by S&P and the bond is also rated AA (stable) by S&P.

The CGIF, established in November 2010, promotes financial stability and investments in the Asean+3 region. It has over US$1.2 billion in assets kept in cash or liquid securities, with a minimum rating of A+. Under the guarantee terms, the CGIF will cover a non-payment event and guarantee any unpaid portion of the principal amount, scheduled interest and additional accrued interest. If there is a missed payment, CGIF retains the right to accelerate principal claim payments or maintain a payment schedule.

At its current indicative yield to maturity of 4.36 per cent with four years to maturity, we think the social bond offers a good alternative to longer-term SGS bonds and SSBs.

The writer is a senior fixed-income analyst of the Bondsupermart team at iFAST Financial Pte Ltd (IFPL), the Singapore subsidiary of iFAST Corporation. At the time of publication, IFPL (via its connected and associated entities) has a position in ASTLC 3.250% 18Mar2031 Corp (USD) - Class A-2 Classified as SIP; FIRTSP 3.250% 07Apr2027 Corp (SGD); FIRTSP 4.9817% Perpetual Corp (SGD). The analyst who produced this column holds nil position in these securities.