SINGAPORE (July 7): June was a decent month for bond markets in Singapore, but OCBC Research analysts Andrew Wong, Ezien Hoo, Wong Hongwei and Seow Zhiqi expect the second half of the year to present greater volatility. A surge in Covid-19 cases has seen increasing dispersion in credit markets as investor sentiments were dragged along by the pandemic rollercoaster. 

Early June saw 10-Year US Treasury yields rise sharply from 0.65% to 0.89% on the back of growing optimism as countries began re-opening their economies. Yet such exuberance proved short-lived as infection rates crept up in China, US and Australia. By the month’s end, yields had fallen back to 0.66% as fears of a second wave of infections crossed the minds of investors. 

Still, investors have continued to trade in investment grade and high yield bonds. US investment grade issuance volumes in 2020 now exceed 2019 full year volumes. Both the Bloomberg Barclays US Aggregate Corporate Index OAS and Bloomberg Barclays US Corporate High Yield Index OAS are tighter m-o-m by 24 base points and 12 base points respectively. 

“Long-term US Treasury yields continue to rise after positive data releases spurred upbeat growth expectations. Singapore government bond yield vs UST spreads narrow at the longer tenors 15-30 years, as well as at the 5-year tenors. Spreads remain tight at the shorter 1-2 year tenors,”  agrees Timothy Ang, credit analyst at Philips Capital.

Asiadollar also showed broadly similar movements, though it exhibited increased dispersion with the Bloomberg Barclays Asia USD Investment Grade Bond Index ending at 2.04%, 20 base points tighter m-o-m. The Bloomberg Barclays Asia USD HY Bond Index ended at 7.80%, 116 base points tighter m-o-m. Such activity drove bond market activity in June despite the Covid-19 risk and fears of US-China tensions. 

This strong performance was helped by large Chinese state-owned enterprises such as China National Bluestar Group Co Ltd, China Construction Bank Corp and China National Petroleum Corp. There was also strong interest in issues from Philippine telecommunications company PLDT Inc and the Republic of Indonesia. Locally, primary activity in the SGD space was helped by a new 10-year issue worth $800 million from the Housing Development Board (HDB). 

“Singapore government yields saw declines over the week with the 5-year yields falling 7bps to 0.51% and the 10-year yields falling 5bps to 0.88%. This indicates decent inflows into Singapore government bonds. The 1-year yields remained unchanged at 0.27%. MAS is expected to issue SGD3.8bn of treasury bills on Tuesday 9 July,” Ang adds. 

Nevertheless, virus concerns and the weaker economic outlook along with rising bankruptcies has led to increased dispersion with the peak to trough movements through the month. This figure came in at 94 base points for high yield (widening 90 base points since hitting the lows) and 28 base points  for investment grade (widening 6 base points since hitting the lows), notes the OCBC team. 

Ang has also witnessed adverse investor sentiment weighing on riskier issuers amid the Covid-19 pandemic. He has identified that Asian US Dollar high yield bond spreads widened (increased) by 4 base points w-o-w to trade higher at 774 base points. These spreads are still trading higher than the 10 year +1 standard deviation spread, he notes in a broker’s report. 

“What credit indices performance perhaps shows more than anything is the magic bullet that central banks have provided so far in 2020 to stave off the onslaught of COVID-19 which drove global economies into lockdown,” explain the OCBC analysts. The team is not confident that the full brunt of the severe Covid-19 economic shock has been fully priced into the wider credit spreads we are seeing vis-a-vis the start of the year. Even traditionally recession proof sectors such as telecommunications, healthcare and retail REITs have suffered from this severe shock. 

2H2020 is therefore seen to be a volatile period where risks and opportunities abound for savvy investors to take advantage of. The OCBC team expects global defaults to rise, with Century Sunshine Group already defaulting on its $101.75 million 7% fixed rate bond as it failed to secure refinancing through a HK$300 million ($54 million) convertible bond issue. They predict that rock bottom interest rates with an uncertain outlook may turn perpetuals into fodder to buffer balance sheets, seeing increasing risks of non-call with distribution deferral risks. 

Still, the OCBC analysts acknowledge that since spreads have widened significantly across the board even for fundamentally sound issuers. Consequently, with the worst of the crisis now over, they recommend that investors seek opportunities beyond the highest bond grades to consider Neutral (4) Issuer Profile names. 

“With yield curves flat, we think a shorter duration makes sense although we also expect the temptation towards longer duration and subordinated structures for extra yield. In that respect, we continue to emphasise structure as key,” they conclude.