Singdollar bonds: Let quality carry and credit do more of the work

THE first half of 2026 was marked by a sharp reversal in interest-rate expectations. Markets initially entered the year anticipating further monetary easing, but the Middle East conflict and disruption to energy supplies have reignited inflation concerns.

Singapore Overnight Rate Average Overnight Indexed Swap (Sora-OIS) rates subsequently rose by around 45 to 60 basis points (bps) across the medium tenors in March, before partially retracing as oil prices eased.

Despite the abrupt repricing, Singapore bonds remained relatively resilient.

Singapore government bonds (SGS) returned 2.3 per cent in H1 2026, while Singdollar corporate bonds gained 1.4 per cent. The latter also outperformed the broader Asian US dollar bond market, which declined 0.5 per cent in Singdollar-hedged terms over the same period.

Fed policy now less predictable

The external interest-rate environment remains the most important source of uncertainty for Singdollar bonds. At its June meeting, the US Federal Reserve maintained the federal funds rate at 3.5 to 3.75 per cent.

However, its projections turned materially more hawkish, reflecting resilient economic activity and inflation that continues to exceed the Fed’s 2 per cent objective.

The Fed’s more hawkish stance limits the extent to which global bond yields can fall. For fixed-income investors, this favours earning carry from current yields rather relying heavily on capital gains from a broad decline in rates.

What this means for Singdollar rates

Singapore interest rates are influenced by global funding conditions and US rate expectations, but they do not move one-for-one with US Treasury yields.

The Monetary Authority of Singapore (MAS) conducts monetary policy through the Singapore dollar nominal effective exchange rate (S$NEER), rather than through a domestic policy interest rate.

In April, MAS slightly increased the rate of appreciation of the S$NEER policy band and raised its 2026 inflation forecast to 1.5 to 2.5 per cent.

We therefore expect Singdollar rates to retain a modest upward bias. They should remain sensitive to changes in global rate expectations but may move by a different magnitude.

Further Fed tightening would likely put upward pressure on Sora-OIS and SGS yields. However, the steeper S$NEER appreciation path, ample domestic liquidity and the retracement in oil prices should help limit the pass-through.

A supportive domestic backdrop

Several domestic factors should continue to cushion the Singdollar bond market. Singapore remains a destination for regional liquidity and wealth flows, helping to maintain ample onshore funding.

Demand has remained firm even as rates have fluctuated. Six-month T-bill auctions recorded average bid-to-cover ratios of around 2.1 times in the first half of 2026, with applications averaging about S$17 billion per auction.

Supply has remained manageable as well. Singdollar bond issuance totalled around S$14.3 billion in H1, modestly below the S$14.8 billion issued in H2 2025.

Financial institutions accounted for about 60 per cent of issuance, reflecting the continued use of Singdollar capital securities and subordinated bonds by global banks and insurers.

The balance between refinancing-driven issuance and persistent investor demand should remain broadly constructive for Singdollar bonds.

Sovereign bonds: Is the yield enough?

As at early July, the 10-year bond offered only around 55 to 60 bps more than the six-month T-bill despite its substantially greater price sensitivity to rate changes.

The value proposition becomes even weaker at the ultra-long end. Extending from the 10-year to the 30-year SGS provided only around another 10 bps of yield, offering limited compensation for the additional duration risk.

We therefore prefer six-month to one-year T-bills within the sovereign segment. They offer capital stability and keep portfolios flexible while the direction of Fed policy remains uncertain.

Investors can roll these instruments as they mature and redeploy the proceeds should longer-dated yields eventually rise to more compelling levels.

Even so, the current sovereign curve does not offer enough incremental yield to justify materially increasing duration. Longer-dated SGS may become more attractive after a further sell-off, but current levels do not provide a particularly generous margin of safety.

Corporates offer better compensation

The corporate bond market offers a more attractive way to earn additional income.

Benchmark Singdollar corporate bonds were yielding around 2.2 to 2.6 per cent across the two to 10-year maturities in early July, while individual securities, particularly subordinated financial bonds and selected unrated issuers, offered higher yields.

More importantly, the shape of the corporate curve is more favourable. The yield pickup over SGS is around 90 to 100 bps in the three to five-year segment, compared with around 70 bps at two years and apabout 60ps at 10 years. The corporate curve also flattens considerably beyond five years.

This makes the three-to-five-year segment the most attractive part of the Singdollar corporate curve on a risk-adjusted basis. Investors receive meaningful additional income over government bonds, while avoiding the larger interest-rate exposure associated with long-dated securities.

Corporate bonds also allow investors to lock in yields for longer, reducing the reinvestment risk associated with repeatedly rolling T-bills. For investors able to hold bonds to maturity, interim price volatility becomes less relevant, provided the issuer remains capable of meeting its obligations.

Selection is therefore critical. Within financials, investment-grade Tier 2 bonds may provide better value than senior bonds, although investors must assess loss-absorption provisions, call assumptions and yields under extension scenarios.

Among non-financial issuers, priority should be given to companies with visible cash flows, manageable near-term maturities and adequate liquidity.

The composition of the Singdollar corporate market provides some support. It includes global banks and insurers, Singapore-focused property companies, regulated real estate investment trusts and government-linked or government-related issuers.

Defaults have remained limited since the Covid-19 pandemic, including through several years of elevated global rates.

Nevertheless, this should not be interpreted as a reason to buy the entire market indiscriminately. The emphasis should remain on quality income rather than simply maximising headline yield.

Combine flexibility with selective carry

We favour combining short-dated sovereign instruments with exposures to medium-tenor Singdollar corporate bonds. T-bills provide liquidity and flexibility, while quality corporates offer better carry and allow investors to lock in income for longer.

This positioning does not require investors to make a precise forecast of upcoming central bank decisions.

In this uncertain rate environment, a disciplined mix of shorter and medium-duration bond exposures (including corporates) can provide investors with a more balanced source of income in H2.

The writer is a research analyst of the global fixed-income team at FSM Global, the B2C division of iFast Financial, the Singapore subsidiary of iFast Corporation