Singapore bonds outlook: Stable rates and more debt issuance

WHEN it comes to fixed income assets, the first thing that comes to mind among the majority of investors would likely be Singapore treasury bills.

Last year, the popularity of Singapore T-bills rose alongside rising interest rates. The T-bills hit a peak cut-off yield of 4.4 per cent in late-2022 and have drawn a frenzied crowd of interest since then.

But coming into 2023, we started to see a divergence between the US federal funds rate and Singapore T-bill yields. Even as the Federal Reserve continued to increase the fed funds rate in the first half of 2023, yields on Singapore T-bills had inversely been gradually coming down.

We see this happening despite yields on the US Treasury rising significantly in April and May. We believe that the continued rise in the US Treasury yields had been due to adjustment of rate expectations upwards after further rate hikes. Yields had dropped during the banking and debt ceiling crises in May.

Ultimately, we believe the situation we see in Singapore remains within our expectations. The monetary environment has been stable as a result of the stringent regulations imposed by the Monetary Authority of Singapore (MAS). If anything, the banking crisis further highlighted the strength and stability of Singapore’s monetary environment.

The stable monetary environment is likely the underlying reason for the rapidly changing sentiment on interest rates, resulting in the divergence of the yields on Singapore T-bills against the US fed funds rate. 

As shown in the accompanying chart, SGD issuances in H1 2023 decreased from H1 2021 and H1 2022, coming close to the levels seen during the pandemic in H1 2020. In addition, the majority of the issuances in H1 2023 came from the financial sector, while issuances coming from other sectors fell off significantly.

The majority of the new issuers within the financial sector were banks. Unlike other sectors, banks are incentivised to borrow more capital to lend out more in 2023. The high interest rate environment is expected to continue staying high for the remainder of the year, allowing banks to benefit from high net interest margins.

Similarly, issuances by region reflected more coming from overseas. Foreign banks comprised a majority of the issuers in H1 2023, especially coming from Europe. Issuances coming from Singapore banks fell to 35.5 per cent, much lower than the 69.3 per cent in H1 2022 and 87.8 per cent in H1 2021.

In addition, unlike previous years, we have yet to see any quasi-sovereign SGD issuances in 2023. In past years, they were major contributors to overall issuances.

Considering the sky-high interest rate environment, borrowing has been difficult for corporates in Singapore. We believe that most corporates likely considered obtaining short-term, temporary loans from banks to tide through this high interest rate period, rather than having to issue new, longer fixed-rate bonds that would require them to pay more over a longer time period.

Destination in sight

Looking ahead to H2 2023, we believe interest rates will continue to stabilise. In the previous two rate-hike cycles in 2006~2008 and 2018~2020, yields on the Singapore Government Securities (SGS) fell off and reached a plateau before the US fed funds rate came to a pause.

Coming into 2023, such a trend might have already begun in the current cycle, given that SGS yields have mostly reached a plateau since the start of the year. Even though the Fed continues to hint at another rate hike in the July meeting, the pause in June and the recent moderation of headline US inflation of 3 per cent year on year suggest we might soon be at the end of the rate-hike cycle.

Although the yields on the SGS spiked recently due to the US debt-ceiling discussions, this appears to be a one-off event which may not have a longer-term impact on yields. As a result, we believe interest rates in Singapore are likely to stabilise from here, given the backdrop of a potential rate pause from the Federal Reserve.

For us to see yields on the SGS break past their previous peak – and given that we are mostly an interest rate taker – we would likely need to see US inflation returning and going past peak levels. As US inflation has already fallen off considerably, given the current outlook for H2 2023, we believe it is unlikely that US inflation would break past the previous peak of 9.1 per cent.

We also believe that the Fed will continue to make inflation its priority in deciding the rate adjustments. It is unlikely it would begin to ease policy, which may allow inflation to return to peak levels.

H2 outlook

With lower expectations for interest rate rises, the environment should become more favourable for Singapore corporates in terms of debt issuances. Moving ahead into H2 2023, we expect to see more SGD corporate issuances from different issuers in Singapore, giving investors more options.

Given the current economic outlook of slowing growth, we still prefer investment-grade over high-yield issuers. In addition, the prospect of higher-for-longer rates as well as improved nominal short-end yields also means that shorter-duration bonds remain attractive.

However, as rates begin to stabilise and the yield curve potentially flattens, investors may consider adding duration to their portfolio to avoid missing out on opportunities.

The writer is a fixed income analyst of the Bondsupermart Team at iFast Financial, the Singapore subsidiary of iFast Corporation