Fixed Income SGD Bonds Outlook 2023 – Will SGD Corps make a comeback?

As Singapore’s monetary policy acts by maintaining the SGD exchange rate, interest rates in Singapore float freely and correlate strongly to the interest rates observed in the US. As with the rise in the Fed funds rate, the short-term rates in Singapore saw a significant rise in yields since the start of the year.

SGD issuances were muted

Chart 2
Historical market issues and the corresponding market volume for the year (SGD m)

At first glance, it appears that 2022 had similar number of issuances to 2021. But excluding the quasi-sovereign issuances for the year, the total issuance volume for 2022 only amounts to approximately SGD 14b, much lower than the total issuance volume for 2021 at approximately SGD 18b. On the other hand, MAS appears to be aware of the quiet market in the latter half of 2022, making up for the lack of SGD corporate issuance with increased T-bill issuance to SGD 122.7b YTD, an increase from the total issuance of SGD 116.8b over the entire 2021.

Chart 3
Market issuance size by sector (left) and country (right) for 2021 and 2022 (SGD m)

Comparing the SGD total market issuance in 2021 and 2022 YTD, the financial sector remained as a major bulk of the issuers in 2022 alongside an increased issuance from the government sector, while all other sectors declined significantly. On the other hand, issuance by Singapore entities dropped in 2022 despite the higher issuance size compensated by the government. Lastly, though the supply of issuance remained considerably strong within the financial sector, we saw a greater number of issuances coming from foreign financial companies instead of Singapore financial companies.

While in general, the banks need to refinance their debt regularly to meet their respective Basel III requirements, we believe the strength of SGD across 2022 has helped with the decision of issuing SGD debt – although refinancing costs have undeniably increased significantly regardless of geographical locations, minus a few.

Rising interest rates had made it difficult for the companies to consider the issuance of debt, given the increasing expectation of interest rates and therefore having to issue at a sufficiently high rate to attract demand. As such, most companies find it hard to proceed with the issuance of debt without a strong cashflow position, which likely becomes even less predictable given the upcoming economic conditions.

Singapore’s position in this volatile, uncertain, complex and ambiguous (VUCA) world

Chart 4

Singapore SGS Yield Curve

As the shorter-term yields have spiked higher than the longer-term yields, Singapore’s yield curve is relatively flat. This provides a better idea of the increased demand for the MAS T-bills and the lack of issuances by Singapore companies, as much higher spreads are now required to attract demand.

Singapore’s forecasted GDP growth is at an estimated 3.5% for 2022 and between 0.5% to 2.5% in 2023. The forecasted GDP reflects the expected economic conditions of a global slowdown, where most major countries are expected to enter a period of recession, or even stagflation. Despite supply chains recovering to a certain level, it remains below the pre-pandemic levels – the cost-push inflation is likely to take an extended period to recover to central banks’ target levels until the demand can adjust to the limited supply.

This translates to less favourable economic conditions for Singapore companies to operate in, where some have already highlighted in their outlook for 2023 that headwinds are likely unavoidable, particularly arising from the high interest rates environment. With concerning operating conditions for businesses and higher-than-ever financing costs, let us examine the prospects for the SGD market into 2023.

Singapore Government Bonds getting more favourable than ever

In a previous article outlining the outlook on T-bills, we expect the short-term rates to continue adjusting to the impending Federal Funds rate hikes, which likely peaks in the middle of 2023. As the current market conditions favour short-duration bonds, SGD SGS between 6 months to 2 years are generally more preferred than the longer tenors – given the higher yields and being less susceptible to interest rate risk.

Currently, we still observe a substantial spread on the SGD SGS against their US treasury counterparts with the spread likely to stay as the rates hit the peak. Historically we have observed the interest rates in Singapore reaching the peak before the US Fed Funds rate. If anything, given that interest rates in Singapore floats relatively freely, the expectations of the Fed funds rate peaking in the early to mid-2023 may result in the spread widening further.

As such, going into the first half of 2023, we have strong reasons to believe that the demand for the SGD SGS will and should remain high, particularly the shorter-term notes. With expectations of the interest rates hitting a peak by mid-2023, we think that the popularity should wane down in the latter half of 2023 where the centre stage is expected to transit to SGD corporates.

SGD Corps will take the centre stage in the latter half of 2023

For investors who can take some risk, investment grade issues or notes similar to investment grade profiles provide some yield pick-up over the risk-free rates. Given increasing headwinds in view of the global economic slowdown, high yield issuers are generally less attractive with their increased volatility amidst the challenging period. As such, we prefer investment grade issuers and issuers with strong credit profiles over higher-yielding notes, particularly with a focus on the short duration bonds as the interest rate risk on the longer duration notes tends to be more significant.

A potential obstacle for the secondary market is a general lack of liquidity for the SGD-denominated notes, as most SGD issuances are of relatively small sizes and some bondholders intend on holding their position to avoid actualising losses.

However, moving into the latter half of 2023, we believe conditions might change wildly for the SGD Corps. With the possibility of interest rates hitting their peak in mid-2023, the SGD bond market might turn more favourable in the latter half for companies to consider the issuance of debt. Expectations on interest rates are likely to hold constant then, becoming easier for companies to consider the issuance of debt with the shift in the sentiments of interest rates. With fairer expectations on interest rates and therefore fairer cost of financing for the companies, we believe more issuances would be happening in the latter half of 2023 after a long hiatus from taking part in the SGD bond market.

But for perps, it is getting a bit different

Table 1

SGD Corp perpetual notes that did not exercise call option after 5 years