BE Commentary: Another green month for bonds after an early scare for high-yield segments

• Most bond markets delivered positive performances in August, across the Global, Asian, and SGD universes.
• While markets are pricing in aggressive rate cuts by the Fed in its coming meetings, we retain our view of higher-for-longer rates. Consequently, we also discourage taking on excessive duration.
• We continue to see strong demand for bonds on our Bond Express platform, particularly for SGD bonds.

August was a great month for bond markets with most core market segments rallying. Global investment-grade and high-yield bond markets rose by about +2%, while Asian (USD-denominated) investment-grade and high-yield bond markets increased by a smaller extent (closer to +1%). SGD bonds (estimated using various Markit iBoxx indices) generally delivered positive returns of close to +1%.

Economic data in the US resulted in expectations of more aggressive cuts by the Fed, which shifted from 3 cuts by end-2024 (as of 31 July) to 4 cuts by end-2024 (as of 31 August). This included weak ISM manufacturing data and a higher unemployment rate; in addition, CPI inflation continued to show signs of cooling in July.

In particular, the ISM and unemployment figures may have led to some flight to safety in the first few days of August. In just 3 trading days from 31 July to 5 August, global high-yield bond markets fell by about -0.5% with spreads widening by close to 60bps, while global investment-grade bond markets rose by about +2% (spreads also widened here but to a much lesser extent). Nonetheless, this divergence narrowed once markets started to digest the impact of these economic data, with both investment-grade and high-yield bond markets ending solidly in the green for August.

UST yields fell across the board with the largest declines seen at the 1y and 2y tenors (about 34bps), though 10y yields also fell by about 13bps. Consequently, the 2s10s spread continued to dis-invert throughout the month, ending at just -1.5bps in end-August (2y: 3.919% / 10y: 3.904% as of 30 August). We observed a similar trend closer to home – both 2y and 10y Singapore Government Securities (SGS) yields also fell across the month; in addition, 2y10y SGS yields dis-inverted in early August with spreads continuing to widen across August, ending the month at about 17.7bps (2y: 2.500% / 10y: 2.677% as of 30 August).

A growing market consensus is that the Fed may do a jumbo-cut (beyond the usual 25bps) this year and / or next. While we now think there is a rising probability of a 25bps cut in the upcoming September meeting, we also reiterate our view that interest rates and yields are likely to stay higher for longer and continue to generally advocate against taking on excessive duration risks.

Related article: Incoming Fed rate cut? Here is how to position for it.

Our recent addition to Bond Express – FWD Group’s 2029 USD bonds – has seen strong demand since its introduction. While SGD bonds still see higher demand, the high yields on this USD paper mean it is still an attractive alternative for investors to consider.

Table 1: New additions to Bond Express

Table 2: Top traded bonds on Bond Express in August

FWD Group Holdings Limited (FWDGHD)

FWD Group Holdings Limited (FWD) is a fast-growing Asian life insurance company which we recently covered. In our last update on FWD’s FY23 results, we expressed a positive view of this issuer, especially as it continued to deliver solid growth based on its operational and financial metrics. We also liked that its credit profile looked fairly conservative with a healthy capital ratio (PCR) and a prudent investment portfolio (majority investment-grade).

Following its 1H24 results, we think its growth story remains intact with metrics like new business sales, value of new business (essentially new business profits), and new business CSMs showing strong double-digit growth. Its profitability metrics have also improved with 1H24 net income turning positive, following the run-off of several one-time headwinds (e.g. Athene) which we highlighted in our previous FY23 update.

Meanwhile, its solvency ratio remains strong at 290% in 1H24, remaining fairly stable from FY23’s 292% (290% indicates that FWD’s available capital is 2.9 times that of the regulatory guideline). Its investment portfolio remains prudent and primarily in investment-grade bonds.

We continue to like this issuer and recommend the 2029 bonds: FWDGHD 8.400% 05Apr2029 Corp (USD). We prefer the 2029 bonds for their more attractive yields (due to subordination risks), and their shorter maturity and duration profiles over the 2031 and 2033 bonds (note: the latter two 2031 and 2033 bonds are also not on Bond Express).

Related article: Idea of the Week: Bonds yielding over 7% from a fast-growing Asian insurance provider

ESR Group Limited (ESRCAY)

ESR Group Limited (ESR) is a ‘New Economy’ real estate manager and developer primarily in the Asia-Pacific region. In recent years, ESR has focused on achieving an asset-light model and investing in various ‘New Economy’ opportunities.

ESR recently released its 1H24 results which broadly came in weaker. 1H24 revenues came in at USD 312m marking a -31% (USD -143m) YoY decline, which in turn was primarily due to a similar drop in fund management EBITDA from USD 329m to USD 174m (-47.1% or USD -155m). ESR attributed this to lower promote fees which accounted for about USD 136m of this shortfall. That said, we expect promote fees to average over time considering ESR’s strong pipeline of projects.

Meanwhile, adjusted profit after tax and minority interests (PATMI) also dipped into negative territory in 1H24 to USD -58m (unadjusted PATMI was USD -219m). Apart from the ‘promote fees’ factor highlighted above, these were weighed down by a USD 97m impairment loss associated with the sale of ARA US Hospitality Trust and a USD 45m fair value loss from its Cromwell associates. Nonetheless, we highlight that ESR remains operating cash-flow positive despite these losses.

ESR’s credit profile appears to have somewhat stabilised. Total and net debt levels have technically seen increases leading to a slight worsening in ESR’s gearing ratio (30.7% in FY23 to 32.3% in 1H24). However, we like that its weighted average interest costs have started to drop from 5.3% (FY23) to 4.9% (1H24). Furthermore, it maintains a decent cash position of USD 1,064m; after accounting for an existing loan facility of USD 2.5b, we think ESR’s liquidity position appears adequate considering its current borrowings of just USD 1,194m.

To summarise, we think ESR’s credit profile remains stable for now despite weakening profitability metrics in 1H24, and bondholders can look forward to the progress of ongoing balance sheet optimisations.

• Yields on the 2025 bonds have fallen due to a pull-to-par effect (as the bonds mature soon in about 0.5y), but we think existing bondholders need not worry about the bond redemption in February 2025 given ESR’s strong liquidity profile.
• As for the perpetuals, we reiterate that perpetuals come with non-call risks, though the 200bps step-up margin could incentivise a call at the earliest reset date (March 2026).

Related article: Idea of the Week: More attractive than SG T-bills? Look no further!

Thomson Medical Group (TMGSP)

Thomson Medical Group (TMG) is a leading healthcare player in Southeast Asia. It primarily has operations in Singapore and Malaysia, while it has also recently expanded into Vietnam, notably with its acquisition of Far East Medical Vietnam Limited (FEMVN) which was touted as one of Southeast Asia's largest healthcare acquisitions.

TMG recently released its FY24 results (period ending on 30 June 2024). While headline metrics have certainly weakened in FY24, we remain optimistic and think TMG can continue benefiting from growth opportunities (especially in Malaysia and Vietnam) over the medium to long term.

• FY24 revenues dipped by 1.3% YoY, primarily attributed to lower contributions from project-related services including vaccination centres in Singapore but offset by higher revenues in Malaysia and Vietnam (Vietnam contribution benefited from the Vietnam acquisition mentioned above).
• Operating expenses (including inventories / consumables / staff costs) generally increased in line with the business growth (particularly in Malaysia and Vietnam), while TMG also recognised some transaction costs and FX losses related to the Vietnam acquisition.
• TMG also saw a large increase in finance costs from SGD 27m to SGD 44m, likely due to taking on more debt for its Vietnam acquisition (mentioned above). Consequently, net profits dipped significantly (-53%) from SGD 41m to SGD 19m.

Its credit metrics have also generally weakened from FY23 to FY24, though this deterioration is somewhat expected given the size of the Vietnam acquisition (SGD 517m for this acquisition, compared to TMG’s market cap of about SGD 1.2b today). For instance, its net debt levels have increased by +104% YoY (to SGD 939m), due to a combination of higher total debt and lower cash levels (FY23: $287m / FY24: $167m) to help fund the acquisition; consequently, many of its net-debt-related metrics have also worsened. In addition, its interest coverage has also weakened – as an example, adjusted EBITDA divided by net finance costs fell from 4.0x (FY23) to 2.5x (FY24).

To summarise, TMG’s headline profitability and credit metrics weakened in FY24. Nonetheless, we still think TMG’s outlook remains decent with multiple growth prospects, particularly in Malaysia and its new acquisition in Vietnam. We believe default risks remain manageable for now, especially if management can deliver on its strategic long-term growth plans.

TMG’s bonds are among the few SGD papers still yielding over 4% p.a. amidst the prevailing interest rate environment. Comparing the 2027 bonds (not on Bond Express) and the 2028 bonds (available on Bond Express), we find that the latter comes with a slight yield pickup of about 30bps (4.57% vs 4.87%) and correspondingly higher spreads, with the downside of a longer maturity (by 1 year). Investors hunting for higher yields can consider the 2028 bonds (TMGSP 5.500% 31May2028 Corp (SGD)), available in odd lots on our Bond Express.

Related article: Thomson Medical Group announces 3-year SGD senior unsecured notes at IPG of 5.60%

Related article: Idea of the Week: Can we still expect Thomson Medical Group to exercise the call option?

HSBC Holdings plc (HSBC)

HSBC is one of the largest European banks – while it is headquartered in the UK, it also has a strong business presence within Asia.

HSBC recently released its 1H24 interim results which we would categorise as broadly stable. On one hand, net interest income fell by -7% YoY to USD 16.9b in 1H24, hurt by lower net interest margins of 1.62% (-8bps from 1H23). However, this was offset by net income gains recorded on ‘financial instruments held for trading or managed on a fair value basis’ (USD 8.1b in 1H23 to USD 10.5b in 1H24 [+30%]), which in turn were lifted by heightened trading activities in the ‘Global Banking and Markets’ segment. As a result, HSBC’s key profitability metrics remained fairly stable: net operating income grew +2% to USD 36.2b, while profit after tax fell slightly by -2% to USD 17.7b.

HSBC’s credit profile remains strong. HSBC’s CET1 ratio came in at 15.0% in 1H24 (FY23: 14.8%), above the issuer’s target range of 14% to 14.5% and the regulatory minimum of 11.2%. As we have mentioned previously, we acknowledge that this CET1 ratio may see negative impacts from the implementation of Basel 3.1 measures, but think that ongoing capital generation and profit accretion should be able to offset such impacts. Turning to asset quality, expected credit losses remained stable at just 22bps in 1H24 (1H23: 26bps / FY23: 33bps). This strong credit profile is also clear from its investment-grade issuer ratings by the three major rating agencies.

We think HSBC is a solid investment-grade issuer – its bonds will generally be lower-risk than the other bonds highlighted above. The 2033 bonds highlighted above (HSBC 5.300% 14Mar2033 Corp (SGD)) have a yield-to-next-reset of 3.79% (note: we expect them to call on their first reset date in 3.5y), which we think still represents an attractive risk-reward proposition.

Related article: Idea of the Week: This global bank stands out in Asia, especially with its record profits for 2023

Related article: HSBC announces SGD PerpNC5.5 AT1 paper at the IPG of 5.625%

About Bond Express

Bond Express is an initiative that allows you to trade a selected list of wholesale bonds with firm executable pricing and volumes, but more importantly, in lot sizes from as little as USD 5,000 for USD-denominated wholesale bonds (or SGD 5,000, USD 5,000, MYR 5,000 for their respective denominated bonds). Click here to find out more about Bond Express.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in FWDGHD 8.400% 05Apr2029 Corp (USD), ESRCAY 5.650% Perpetual Corp (SGD), TMGSP 5.500% 31May2028 Corp (SGD), ESRCAY 5.100% 26Feb2025 Corp (SGD), IFASTC 4.328% 11Jun2029 Corp (SGD), and HSBC 5.300% 14Mar2033 Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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