Despite several challenges, it has been a net positive in 1H2021 for the Singapore dollar (SGD) corporate debt market, which has been on the mend since the last quarter of 2020.
At the start of the year, there was a heightened risk of bear-steepening, where the widening of the yield curve was caused by long-term interest rates increasing at a faster rate than short-term rates.
The market environment looked challenging for investors who were only allowed to invest in very highly rated credits, particularly those concentrated on the long end. Very high-grade bonds, such as those issued by HDB and Ascendas REIT, saw steep price falls in 1Q2021 due to an inflation-driven increase in rates before a partial rebound in 2Q2021.
That said, prices of crossover bonds, which are bonds bordering investment-grade and high-yield, stayed stable or were bid up.
SGD corporate bond issuances (excluding statutory boards) rose 42% y-o-y and 60% h-o-h, totalling approximately $10.8 billion in 1H2021. The rise in issuance size was largely driven by a stronger economic outlook, underpinned by improved pandemic response measures and targeted sector support. This resulted in investors being more optimistic, and companies pursuing growth despite the ongoing global public healthcare crisis. That said, 2H2021 may be plagued by uncertainty on the back of tapering talks and rate hike speculation.
Here is what we expect for the months ahead:
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Higher acceptance of perpetuals
Among our main calls for 1H2021 was for investors to take on higher credit risk and/or subordination risk for 1H2021, which involves targeting selected perpetuals that generate structurally higher yields of more than 3%. Perpetuals comprise 39% of the $10.8 billion of newly issued bonds in 1H2021, signalling popularity among investors and issuers alike.
Unlike other local currency bond markets in the region, perpetuals are an integral part of the SGD corporate bond market. There were other time periods when perpetual issuances were significant. Of note though, $900 million of the perpetuals priced in 1H2021 were from REITs, which is a stark contrast with 1H2020, when there were no REIT perpetual issuances.
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REITs historically saw perpetuals limited to only a handful of issuers, with relatively standardised issue structures and no step-up margins to serve as an economic incentive for a redemption at call date.
With REITs structured as stable cash-flow generators, the expansion of the REIT perpetual market is welcome. Despite recent price weakness from the large supply, spreads of corporate perpetuals have widened such that yields are similar to that issued by financials. We expect this segment to still be positive on a total return basis in 2H2021.
Sustainability papers likely to flourish as bond issuers transition
Singapore has stepped up the pace on several green development plans. The government rolled out the Singapore Green Plan 2030 in February, and more recently, the Monetary Authority of Singapore consolidated its myriad green efforts into an inaugural sustainability report, reinforcing its plans to accelerate Singapore as a green finance centre.
There are similar parallels in the bond world. This year, two green bonds and one sustainability-linked bond (the first in the SGD market) were met with strong interest from investors, raising $950 million in total.
We expect such issuances, while starting from a low base, to grow in the next half of the year. This is especially so with large Singapore corporate bond issuers transforming themselves into green building and sustainability solutions providers, while financial institutions are catalysing many of these plans, both for their own sustainability plans as well as those of their clients.
Bond portfolios to face more volatility in 2H2021
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While we were convinced there would be a bear-steepening in 1H2021, 2H2021 is set to be a highly uncertain time where interest rates are concerned, given the recovering economic environment and the impending start of a rate-tightening cycle.
The rates rally in June 2021 suggests that the market may be pulling back on inflation expectations, though we view that this may be temporary and expect the market narrative on tapering and timing of the first-rate hike to dominate in 2H2021.
Beyond the mixed comments from various members, overall, the US Federal Reserve is taking on an increasingly hawkish stance. We think that it is only prudent to account for such event risks and remain defensive on bond selection. As such, we are still prioritising credit risk and subordination risk over interest rate risk to generate returns from the SGD corporate bond market.
Rather than pulling back entirely from long-dated bonds, we advocate for the diversifying of holdings into three main categories: short-dated bonds maturing within three years, longer-dated “crossover” names for additional yield pick-up, and perpetuals issued by financial institutions and corporates.
While the secondary market may be more volatile in 2H2021, we expect primary market issuance to remain robust with issuers intending to lock-in funding costs, which by accounts of the past five years remain very low.
While the transition of the SGD corporate bond market to the Singapore Overnight Rate Average has been more gradual compared to the corporate loan market, we also expect such discussions between issuers and their advisers to feature more in 2H2021 as the deadline for transition nears.
Andrew Wong, Ezien Hoo, Wong Hong Wei and Seow Zhi Qi are credit research analysts at OCBC Bank’s global treasury research & strategy
Photo: Samuel Isaac Chua / The Edge Singapore