The 2H24 SGD Bonds Outlook

This had great implications across bond markets in 1H24. On one hand, shorter-tenor bonds remained a safe haven for investors, on the other, yields for the longer-tenor bonds experienced greater fluctuations. With 1H24 mostly in line with what we had expected, we look back at the highlights across the first half, and outlined our expectations for the second half.

How has SGD bonds fared in 1H24?

Singapore Government Securities (“SGS”) yields jumped higher in early 2024 (Chart 1), particularly for the medium-to-longer term, fueled by the pushback of Fed rate cuts. This rise in yields reflected a rebound from the sharp drop late last year, following strong market expectations for rate cuts. Yields on 5-year and 10-year SGS rose by around 50 bps since the start of the year while, at one point, they were more than 70 basis points (“bps”). The movement in Singapore benchmark rates mirrored that of SGS yields, with SORA-OIS of various tenors observing similar trends to their SGS counterparts (Chart 2).

The impact from the higher yields led to mark-to-market losses on these triple-A rated securities, with Singapore government bonds falling by -1.7% year-to-date (“YTD”) (measured by Markit iBoxx ALBI Singapore Government Total Return Index in SGD terms) (Chart 3).

On the other hand, the situation had been different for the SGD corporate bonds. Credit spreads for SGD corporate bonds tightened across the first half of 2024, driving approximately +2.9% return YTD (measured by Markit iBoxx SGD Corporates Total Return Index in SGD terms), offsetting the mark-to-market losses from higher benchmark rates. We believe this might be a result of SGD corporate bonds’ lower liquidity relative to its sovereign counterpart, leading to lesser price volatility throughout 1H24.

There was a strong supply of SGD corporate issuances due to favorable conditions such as lower yields and benchmark rates in 1H24. Year-to-date, issuance volume more than doubled as compared to 1H23 (Chart 4) – increasing from SGD 8,916m in 1H23 to SGD 18,164m in 1H24. This was the highest within a half-year period across the past five years, although notably 1H24 saw significantly more quasi-sovereign issuances (1H24: SGD 5,700m vs 1H23: SGD 0m).

Financials continue to see the most issuance as compared to all other sectors, with banks and dominating the upper ranks of the list sorted by issuance volume (Table 1). Overall, the strong pipeline of issuances provided investors with more than sufficient options to tap into SGD corporate bonds space.

Chart 1
Yields on the Singapore Government Securities (%)

Chart 2
SORA-OIS rates of various tenors (%)

Chart 3
Performance of SGD Corporate Bonds and SGD Government Bonds (indexed to 100 = 1 Jan 2023)

Chart 4
Volume of SGD Corporate bond issuances of historical half-year periods

Table 1
Top ten issuers for YTD 1H24, with seven financial institutions

SGS in 2H24 – A lower probability for volatility

As compared to the dissonance at the beginning of 2024, our initial views of no rate cuts in 2024 is significantly more in line with the market and Fed’s own projection. Given the adjustment in market expectations from six to approximately one or two rate cuts, we are unlikely to see a repeat of this drastic change that we saw across 1H24. As a result, we believe that volatility on bond prices will stay dampened for the remainder of the year.

However, higher-for-longer interest rates continue to be our base case for 2024 and we expect no Fed rate cuts for the remainder of 2024. Inflation has proven to be sticky – a key reason for the adjustment in market expectations of rate cuts this year – and we believe inflationary pressure will stay persistent. We also think that shelter and energy inflation remain as sources of possible upside risks to inflation, leading to a bumpy descent moving ahead.

In 2H24, we expect SGS yields to stabilize around the current levels absent Fed rate cuts and likely to stay rangebound. A majority of the SGS auctions have also been completed for the year, with only three (5-year, 15-year and 50-year auctions) out of nine remaining. This suggests a lack of fresh supply which we believe will help to sustain the current yield for most SGS.

Similarly, for the Singapore Treasury Bills (“T-bills”), yields stood mostly stable and are expected to hold steady for 2H24, supported by further pushback on Fed rate cuts. With our case of no rate cuts for 2024, yields for 6-month T-bills are likely to hover around 3.70% - whereas yields for 1-year T-bills would be slightly more dependent on the supply and demand dynamics during the quarterly auction. We still prefer the T-bills among the SGD sovereign bonds, considering our view on short-duration and with T-bills offering attractive yields. However, for investors with greater risk appetite, opportunities are aplenty within the SGD corporate bonds space. 

SGD Corporates in 2H24 – Treasure hunt amidst tight spreads

Credit spreads for the SGD corporates have tightened across the board since the start of 2024, but we think investors need not worry about spreads widening given supportive economic conditions. Singapore’s economy appears to be heading in a good direction, with GDP in 1Q24 seeing a +2.7% growth year-on-year (“YoY”) and the Singapore government maintaining a projection of 1.0% to 3.0% expansion for 2024.

Meanwhile, the Survey of Professional Forecasters for June 2024 by the Monetary Authority of Singapore suggests a median forecast of +2.4% GDP growth YoY for 2024, well above GDP growth of +1.1% YoY observed for 2023.

We believe the improving conditions will be a driver of earnings growth for most SGD non-financial corporates in Singapore. Moreover, as interest rates have peaked, credit profiles of these companies are gradually stabilizing after the initial impact on finance costs and asset valuations. Given the underlying reasons, we anticipate the spreads for SGD non-financial corporates to stay tight, though room for further tightening should be minimal.

For investors still sitting on the fence whether to dive into SGD corporate bonds, we believe now would be a great opportunity. Considering the numerous issuances in 1H24, there is a galore of attractive options for bond investors to choose from. With that said, optimal credit selection remains essential given the varying issuer profiles. Below, we highlight two general areas that we prefer, namely (1) financial issuances and (2) non-financial issuances.

1) Financial issuances – Investment-grade, bank bonds

A large number of investment-grade offerings are bank bonds – an area that we remain largely positive of. A majority of the banks issuing SGD credits have seen great performance since the beginning of rate hikes, enabling substantial net interest income growth. While the ongoing rate pause might be detrimental to further earnings growth, banks are likely to see profits staying elevated in the short-to-medium term, given higher-for-longer interest rates.

In the table below, we have highlighted investment-grade issuances that we find attractive. For Commerzbank’s 2034 paper, despite the rating at rated BB+/Baa3 by S&P/Moody’s respectively, we expect a possible credit rating by S&P given the positive outlook placed on the bank. While the banks’ Tier 2 papers might see a relatively long maturity term, we expect the call option to be exercised given that banks are incentivized to redeem and refresh their Tier 2 capital earlier. Alternatively, we believe Deutsche’s 2026 paper would be a great option for investors looking to minimize their duration risk.

BNP 4.750% 15Feb2034 Corp (SGD) is an issuance that we like despite the recent political turbulence in France. For context, French president Macron has for a snap election after being defeated by France’s right-wing party in the 2024 European Union parliamentary elections. French banks – namely Societe Generale, BNP Paribas and Credit Agricole – suffered a drop in share price of approximately 10% at the onset of the announcement while bond spreads widened for these banks.

The negativity arose from the fears of right-wing parties potentially winning the France elections, which has proposed for significantly higher government spending and potentially worsening the current budget deficit. Despite the ongoing negativity, we largely remain confident of the French banks for now as we await the election results – especially for BNP Paribas, which see greater business diversification overseas as compared to the others.

Table 2
Recommended SGD bank bonds

2) Non-financials – Attractive yielding, short-duration bonds

Within the SGD non-financials bond space, most bonds are unrated but amidst our coverage, there are several unrated issuers that we like. These are issuers that we established to have a positive or stable outlook and credit profile.

Olam’s 2026 fixed rate note is attractively priced, offering more than 5% with less than 2 years to maturity. While its credit profile saw a deterioration compared to past years, the gradually recovering earnings – on the backdrop of easing profit headwinds – should allow its credit metrics to improve from here.

For investors looking for shorter-duration options, Thomson Medical Group’s and ESR Group’s 2025 fixed rate notes offer a considerable spread over the 6-month T-bills. Given their credit profiles, we think that both papers offer great compensation to investors for the additional credit risk to undertake.

Finally, among the real-estate space in Singapore, Straits Trading Company and OUE REIT provide immense value given the respective issuer’s profile. Straits Trading Company is expected to remain stable in the short to medium term, with an overall healthy credit profile owing to prudent leverage, strong liquidity and a generally stable cashflow. For OUE REIT, it has been rated BBB- (Stable) by S&P Ratings in October last year, and currently offering one of the better yields across the investment-grade rated REIT issuances within the SGD corporate space.

Table 3
Recommended SGD corporates