Opportunities in the S’pore bond market: Go for shorter-dated bonds
Moving into the second half of 2022, here are 3 themes to watch for in the SGD bond market
In the first half of 2022, equity and bond markets suffered losses as supply constraints and geopolitical tensions impacted the markets negatively. The Russia-Ukraine crisis, Covid-19 lockdowns in China, and rising global food protectionism fueled inflation in the first half of 2022. This led to the US reporting one of the highest inflation data in over 40 years. In May 2022, the US’ headline Consumer Price Index came in at 8.6 per cent year on year (yoy), the largest increase since 1981.
This led to the US Federal Reserve opting for a 75 basis points rate hike of its Federal Funds Rate in June, in order to tame inflation in the US, the largest rate hike in over 28 years. This sent the US Treasury (UST) yield curves higher as a result. For the first half of 2022, the 10-year UST yields have risen approximately 130 basis points for the first half of the year.
Interest rates in Singapore have also risen. The Singapore Overnight Rate Average (SORA) rose by about 150 basis points for the first half of 2022. In Jan and Apr this year, the Monetary Authority of Singapore opted to tighten monetary policy through the S$NEER policy band in order to combat inflation in Singapore. In May, Singapore’s CPI-All items inflation rose by 5.6 per cent yoy while core inflation rose to 3.6 per cent. Higher prices across a broad range of categories including food, services, retail and other goods, as well as electricity & gas, contributed to inflation for May.
Going into the second half of 2022, we expect inflation to stay elevated in the near term and aggressive rate hikes by the US Federal Reserve up until the end of 2022.
New issuances dominated by banks
In the Singapore-dollar (“SGD”) bond market, total new SGD bond issuance increased by 6.5 per cent in 1H2022, from S$10.8 billion previously to S$11.5 billion of new bond issuances. The bulk of new SGD bond issuances was in June, dominated by bank capital instruments such as additional Tier 1 (“AT1”) and Tier 2 bonds from various banks.
New issuances were also priced at a much higher yield due to the increase in interest rates. New AT1 perpetual bond issuances from Barclays and Societe Generale were priced at 8.30 and 8.25 per cent, respectively. Other banks that tapped the SGD space were OCBC, UOB, HSBC and ABN AMRO.
The reason behind an increased trend in bank capital debt could be because it is cheaper for banks to issue in SGD. and to bolster their capital position as banks anticipate higher loan-loss provisions in the coming quarters. Another reason could be the lack of supply of AT1s in the SGD space. Barclays 8.30 per cent perpetual bond had an issue size of S$450 million and the book was more than S$750 million, reflecting high demand and appetite from investors for higher yields.
Heading into the second half of 2022, we expect the increasing trend of AT1 and Tier 2 bond issuances to continue in the SGD bond market as banks look to bolster their capital positions. High-yield seekers can look into the AT1 and Tier 2 space for higher yielding bonds such as the BACR 8.300% Perpetual Corp (SGD) with an indicative yield-to-worst of 8.35 per cent and a call date on 15 Dec 2027.
Attractive yields from Singapore government bonds
In the most recent Singapore Savings Bond (“SSB”) issue, subscribers stand to gain an average 10-year return of 3 per cent if held to maturity. In the past year, the 10-year average return of SSBs has seen a steady increase, reaching the highest level since inception in Oct 2015. The first-year coupon for the latest SSB is 2 per cent per annum, and the rate rises the longer you hold to maturity.
We could continue to see interest rates for SSBs rise as interest rates rise in Singapore. For retail investors, SSBs can be a safe option to diversify your portfolio and earn a steady income during market volatility. Furthermore, it offers more flexibility as the tenor of the bonds is not fixed and investors can choose when to redeem the bonds.
Limit exposure to long-duration bonds
As interest rates are expected to continue to rise in the near term, we prefer a portfolio with shorter-dated bonds as they can mitigate the volatility arising from interest rates rises. Shorter-dated bonds will be less volatile and the decrease in their bond prices will be less severe compared bonds with longer tenor.
Bonds such as the STRTR 3.750% 29Oct2025 Corp (SGD) from The Straits Trading Company and the METRO 4.300% 02Apr2024 Corp (SGD) from Metro Holdings Limited provide the opportunity to invest in diversified businesses at a shorter tenor. STRTR 4.100% 04May2026 Corp (SGD) has an indicative ask yield-to-maturity (YTM) of 4.52 per cent with 3.8 years remaining to maturity. The METRO 4.300% 02Apr2024 Corp (SGD) has an ask YTM of 3.79 per cent with 1.7 years to maturity.
As we expect interest rates to continue to rise in the near term, a portfolio of shorter-duration bonds will help to cushion the downside impact and volatility of a rising-rate environment.
The writer is a fixed income analyst of the Bondsupermart team at iFAST Financial Pte Ltd, the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd. For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a position in METRO 4.300% 02Apr2024 Corp (SGD), STRTR 3.750% 29Oct2025 Corp (SGD) and STRTR 4.100% 04May2026 Corp (SGD). The analyst who produced this column holds a NIL position in these securities.
