SINGAPORE (June 8): UOB KayHian is maintaining its “overweight” on Singapore’s banking sector given the recent correction in the bond market as well as sustained strength in the US dollar.
In a Friday report, UOB analyst Jonathan Koh says the recent rise in government bond yields around the world is a US-centric phenomenon.
Koh attributes the rise to the record issuance of US treasury bills and government bonds to finance the enlarged budget deficit after the Trump administration cut corporate tax rate from 35% to 21%.
There were also worries that trade conflicts would reduce China’s trade surplus with the US, thus reducing demand for US treasury bills and government bonds from China.
Future hikes in US interest rates would increase the burden for the US to service its national debt too.
As a result, the yield for 10-year US government bond spiked by 58bp to 2.99% year to date.
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The turmoil for US government bonds was transmitted to the corporate bond market. Based on Bloomberg Barclays Total Return Index, yields for investment grade and high-yield US corporate bonds increased 77bp and 63bp to 4.02% and 6.35% year to date respectively.
Singapore was not left unscathed. Yield for 10-year Singapore government bond jumped 58bp ytd to 2.58%. Yield for the Bloomberg Barclays Singapore Total Return Index, encompassing both government bonds and corporate bonds, increased 47bp to 2.45% year to date.
“Higher yields for corporate bonds would have a positive impact on pricing for corporate loans,” says Koh.
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Meanwhile, although Fed Chairman Jerome Powell maintains he sees “no evidence that the US economy is overheating”, there are quarters within the Fed concerned that the labour market is tight and wage inflation could pick up, necessitating a faster pace of hikes for the Fed funds rate going forward.
The widespread expectations of rapid and successive hikes in US interest rates also strengthened the US dollar.
“We have witnessed a concurrent selldown of regional currencies across emerging markets since mid-April, similar in direction but smaller in magnitude compared to the taper tantrum in 2013,” says Koh.
In Singapore, strength of the US dollar usually boosts higher swap offer rate (SOR), which has a positive knock-on impact on Singapore interbank offer rate (SIBOR).
The strengthening US dollar caused steep rise in both the SOR and SIBOR during 2H14 and 2015. Recent strength in the US dollar, if sustained, should also be a booster for the SOR and SIBOR.
Maintain “overweight”. Buy DBS and OCBC. As at 1.27pm, shares in DBS are down 10 cents to $28.70 while shares in OCBC are down 19 cents at $12.65.
