Idea of the Week: Here are some alternatives to Singapore Government Bonds

Note: This article was first published on the Business Times on 22 Nov 22.

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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% in 2021 to 4% 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% in Jan this year to 3.92% on Dec 01. As a result, the yield on Singapore Government Securities (“SGS”) has risen. In November, SGS bonds are yielding on average 3.14% for the 2-year SGS, and 3.07% for the 10-year SGS. The yield for bonds of shorter tenor, such as the 6-month SGS Treasury bills (“T-bills”), stands at 3.9%.

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%. The previous November tranche was 2.4 times oversubscribed as investors poured SGD 2.2b into SSBs, more than the allocation amount of SGD 900m. T-bills have also garnered substantial interest. The latest six-month T-bill auction attracted a record 92,000 bids totalling SGD 14.2b. The issuance was 3.2 times oversubscribed for a total allotment of SGD 4.5b.

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 SGD 4.3b before government grants and taxation. About SGD 4.4b in government grants was provided to cover the deficit. Since 1960, the total cumulative grant from the Singapore government has amounted to SGD 43b. After including government grants, net surplus for the year was SGD 57.1m, and total comprehensive income for the year was SGD 57.5m.

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% and 4.28%, 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 SGD 1,000. In the SGD 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 4.13%. It has an early call date, Jun 24, 2024, where 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 SGD 380m, which was sufficient to redeem the full outstanding amount of SGD 315m 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% 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% 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 USD 1.2b 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 4.38% with 4 years to maturity, we think the social bond offers a good alternative to longer-term SGS bonds and SSBs.