At OCBC Credit Research, we have observed a general pensiveness in credit markets year-to-date as persistent inflation prints and high inflation concerns fed through to issuance trends. Overall issuance volumes are down year-on-year while issuance trends have turned increasingly selective.

This highlights a progressive tightening in liquidity that threatened to boil over in March. Several high-profile bank failures culminated in UBS’s acquisition of Credit Suisse and volatile sentiments surrounding Deutsche Bank.

While volatility remains the name of the game, the developments in March and general risk-off sentiments should provide some conviction for investors as to the way forward.

Rates and risks suppressed issuance volumes in March

Risk-off sentiments took hold in March as the consequences of the previous rate hike path to contain inflation began to take effect. A relatively one-way upward trajectory in 10-year US Treasury yields through February gave way to a highly volatile month with two weeks of noticeable swings in the middle of the month as 10-year US Treasury yields dipped and rose by 10 to 20 basis points (bps) daily. The twin effects of a potential US banking crisis and entrenched inflation whipsawed investors’ expectations on the path of US rates.

Overall, 10-year US Treasury yields are down 45 bps as at March 31, compared to the end of February, highlighting the prevailing risk-off sentiments in the market and lingering concerns on the financial institution’s sector that drove investors to the safety of US Treasuries following the collapse of Silicon Valley Bank and Signature Bank.

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Amid rate volatility and concerns about systemic risk, US bond issuances dried up in the middle of the month. Up till March 31, new investment grade issues in March totalled US$99.2 billion ($131.6 billion), according to Bloomberg, down from more than US$140 billion priced in each of January and February this year.

The US banking sector concerns prompted Treasury Secretary Janet Yellen, in her testimony in the middle of the month, to state that “I can reassure the members of the committee that our banking system remains sound and that Americans can feel confident that their deposits will be there when they need them”, as her department watched for any signs of tightening credit and focused on ensuring financial stability.

Similar opinions were voiced by other authorities globally, including European Central Bank President Christine Lagarde, who commented that the banking sector is currently in a much stronger position than it was back in 2008, with tools and facilities on hand to fight a liquidity crisis.

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On a relative basis, the Asia dollar market was quiet, with investors and issuers taking on an observer status. That said, technical and fundamental influences were also likely influences. The Bloomberg Asia USD IG Bond Index average OAS widened 19 bps month-onmonth to 141 bps.

In comparison, the Bloomberg Asia USD HY Index average OAS widened 125 bps month-on-month to 1,012 bps. However, it remains well below the levels seen at the end of October to mid-November 2022 when concerns in the China property space accelerated.

Part of this may be due to the slowdown in issuance volumes that has progressively accelerated year-to-date and added some technical support for spreads in the context of rate volatility. A total of US$7.9 billion was priced in March, down from US$13.3 billion in February and US$32.8 billion in January. While issuance volumes declined, developments in China property have increased, including the announcement of China Evergrande Group’s restructuring plan 15 months after its first default.

In a 200-page Hong Kong Stock Exchange filing, amongst the many announcements were China Evergrande investors being offered new notes maturing in ten to twelve years or a combination of new debt and instruments tied to the shares of China Evergrande, its property-services unit, or its electric-vehicle division. Scenery Journey creditors are offered US$6.5 billion of new bonds, while Tianji investors will receive US$800 million of new notes.

Interest on the new bonds can be paid in cash or in-kind (additional debt) for the first two-and-a-half years. The debt restructuring will be implemented through schemes of arrangement or other proceedings and may require approval from at least 75% of creditors in value. China Evergrande expects that the restructuring will be effective in October.

Singapore dollar credit remains defensive

The Singapore dollar space was not immune to prevailing global credit influences, although it remained somewhat resilient on the fall in rates, with around $3.0 billion priced from a variety of issuers, including City Developments, a property developer with a strong sustainability focus, pricing a $470 million five-year bond at 4.139%, the National University of Singapore pricing a $340 million 10-year green bond at 3.268%, Mapletree Pan Asia Commercial Trust pricing a $150 million seven-year green bond at 4.25%, Sembcorp Industries pricing a $350 million seven-year green bond at 4.6% and Hotels Properties pricing $125 million of five-year senior unsecured bonds at 5.25%. A green bond instead of a sustainability-linked bond was potentially chosen by Sembcorp Industries, given the recent controversies on emissions reporting.

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The bulk of issuances, however, came from financial institutions who priced in the first week of March, with HSBC Holdings pricing a $1 billion 10-year non-call five Tier 2 at 5.3%, Barclays pricing a $400 million of Additional Tier 1 non-call-June 2028 (first reset is three months later in September 2028) at 7.3% and several other Financial Institutions pricing oneyear senior papers.

Given the current hesitation towards systemic risks within the financial institution’s space, we expect that issuance from financial institutions will take a breather for now. Liquidity in the bank capital space remains constrained and price discovery challenging, particularly within the European Additional Tier 1 space following the write-down of the $750 million CS 5.625% PERP. That said, the market is continuing to thaw, albeit slowly.

For non-European names, we are moving our bond level recommendations on Singapore dollar bank capital instruments to neutral as price volatility will likely remain for the foreseeable future. This also reflects our view of underlying credit fundamentals.

With sentiments remaining shaky and rising concerns of a recession, the focus may be on widening the credit spread rather than raising interest rates. This raises the spectre of call risk within overall structural risks for bank capital instruments and corporate perpetual.

Mapletree Logistics Trust announced that its $180 million MLTSP 3.65%-PERP would not be redeemed on the first call date, and the distribution rate has since been reset to 5.2074% per annum. This allows MLT ample debt headroom to take advantage of investment opportunities considering the uncertain macroeconomic conditions and interest rate environment.

In addition, Lippo Malls Indonesia Retail Trust has elected not to pay distributions to the holders of its $140 million LMRTSP 6.4751%- PERP. By stopping distributions to unitholders ($23 million) and perpetual holders ($19 million), LMRT is estimated to save a combined $42 million per annum. LMRT announced that its ratings were downgraded on its challenging refinancing commitments.

Prior month’s issuance trends have been relatively selective, and financing conditions will continue to tighten against prevailing risk-off sentiments on financial sector contagion concerns. This should result in a higher focus on credit quality, and bottoms-up analysis focused on the liquidity position of issuers.

We expect credit dispersion to increase for both issuers and issues against this backdrop. While market expectations are that we are closer to terminal rates than before, duration should remain short-to-belly against the uncertain economic outlook.

Andrew Wong, Ezien Hoo, Wong Hong Wei and Chin Meng Tee are credit analysts with OCBC

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