Trends to watch in the Singdollar bond issuance market 

 The recent flurry of Singapore dollar credit issuances despite geopolitical headwinds and inflationary pressures is a reflection of the rising interest rate environment. Notably, market participants are pricing in more than 7 rate hikes from the US Federal Reserve this year, while Fed chairman Jerome Powell also hinted at further 50 basis points (bps) rate hikes in subsequent meetings by the Federal Open Market Committee.

Global central banks are aggressively tightening their monetary policies to combat decade-high inflation, which is one of the key drivers for SGD bond issuers to tap into the capital markets before further rate increases. In the year to date, the new SGD bond issuances are worth about S$6.3 billion, of which S$4.8 billion were priced from March to May after the Fed announced its first rate hike since 2018 during the March meeting. With the rising interest, we outline here three things to look out for.

1. SGD bond issuance market to remain robust in the near-term

We can expect the SGD bond issuance market to remain busy in the near-term, as issuers will look to raise capital and refinance their existing borrowings at comparatively lower interest rates before further rate hikes are announced.

Flows in new SGD bond issuances have been relatively strong particularly among the Temasek-linked names, with investors hunting for higher yields among the safer credit issuers. Future new issuances will likely have a short-to-medium tenure of 3 to 5 years, as issuers look to capitalise on the demand for lower duration bonds during a rate hike cycle.

2. ESG bonds on the rise

There has been an increasing recognition for ESG (environmental, social and governance) bonds in the Singapore market with rising demand from investors. Notably, the 4 common types of ESG bonds include green, social, sustainability and sustainability-linked notes.

In March, the Housing and Development Board issued its inaugural green bond at 1.845 per cent, while Ascendas Reit also priced a 7-year SGD green bond at 3.468 per cent in April, tightening 28.2 bps from its initial price guidance. Proceeds from the bond offerings will be used to finance eligible projects in accordance with the Reit’s Green Finance Frameworks, such as those relating to green buildings, renewable energy and clean transportation.

The Ministry of Finance recently announced that Singapore will be issuing S$35 billion of green bonds by 2030 to fund public sector green projects. The new issuances will come from the government and statutory boards. As companies and institutions continue to embark towards net zero emissions, we can expect more green bonds in future issuance pipelines.

Meanwhile, First Reit launched a 5-year SGD social bond in March at a final price guidance of 3.250 per cent. The social bond is backed by the Credit Guarantee and Investment Facility, which is a trust fund of the Asian Development Bank and is rated “AA” by ratings agency S&P. It is priced according to First Reit’s Social Finance Framework, which has specific social benefits and sustainability outcomes such as providing essential healthcare and nursing home services to the general population in Indonesia.

April also saw 2 sustainability-linked issuances from Sembcorp Industries and Ascott Residence Trust. Sembcorp launched a 7-year senior unsecured sustainability-linked bond (SLB) at 3.735 per cent, while Ascott Residence Trust also issued a 5-year SLB at 3.630 per cent.

Typically, SLBs have specific sustainability performance targets (SPT), following which there could be a coupon step-up or step-down margin depending on the issuer’s ability to meet the defined performance indicators. Unlike green and social bonds, SLBs are usually not tied to financing specific projects, and entities that issue SLBs can set key performance indicators that are aligned with their sustainability goals and strategies.

So far this year, about 29 per cent of the SGD issuance volume are ESG related. ESG bonds will remain as a crucial part of the SGD credit market as the investor base in ESG bonds has grown over the years. In some cases, issuers may price ESG bonds inside its own yield curve due to its premium, and thus put them out at lower coupon rates compared to its vanilla bonds. Nonetheless, we have not seen a significant ESG premium in the SGD credit market, as recent issuances were still priced at attractive levels relative to the existing vanilla bonds.

3. New issuances are priced at more attractive levels than existing bonds

Despite the volatile macro environment and rising interest rates, we still see a strong appetite among investors to take up new SGD papers. We believe that this is due to the relatively stable nature of SGD credit issuers, as well as the recent influx of new issuances following the drying up of new supply at the start of this year.

Credit spreads for Asian investment grade and high yield bonds have increased steadily since the start of April on the back of slowing economic growth, geopolitical uncertainties and China’s covid lockdowns. As such, companies are issuing bonds at larger credit spreads as investors demand for greater returns amid the market volatilities and higher inflationary pressures.

Notably, the rising interest rate environment has also sent the benchmark Swap Offer Rate and Singapore Overnight Rate Average higher. As a result, most of the new issuances are priced at higher yields as compared to its existing bonds with similar tenures.

Among the new SGD issuances that we have covered so far, we find that most of them are priced above their yield curves at the time of initial public offering. Therefore, investors should keep a look out for new SGD bond issuances that might be more attractive than the existing secondary market bonds.

The writer is a fixed income analyst of the Bondsupermart Team at iFAST Financial Pte Ltd (IFPL), the Singapore subsidiary of SGX-listed iFAST Corporation Ltd.  At the time of publication of this report, IFPL (via its connected and associated entities) has a position in FIRTSP 4.9817% Perpetual Corp (SGD), FIRTSP 3.250% 07Apr2027 Corp (SGD) and ARTSP 3.070% Perpetual Corp (SGD). The analyst who produced this column holds a NIL position in these securities.