THE local bond market is sizzling as interest rates slide. The latest to join the rush were two bank issues on Wednesday which clinched combined orders of almost S$4 billion.
United Overseas Bank sold a new Basel III perpetual non-call 5 perpetual 4 per cent coupon, tightened from initial 4.25 per cent guidance after it got over S$2.4 billion orders. The bank is expected to issue S$750 million of bonds.
UOB's transaction represents the largest subordinated bank deal since its last Tier 1 deal done back in 2013 and the largest order book for any transaction in all the SGD market for 2015 and 2016, said Sean Henderson, HSBC's Asia-Pacific deputy head of debt capital markets.
"The fact that they managed to achieve this in a busy market with competing supply is testament to the strength of the UOB name and the increasing sophistication and depth of the investor base," said Mr Henderson. Particularly pleasing has been the strength of the institutional order book, with significant demand from insurers, he said.
Societe Generale is also issuing a new Basel III 10-year non-call 5 issue at 4.3 per cent, tightened from initial 4.5 per cent guidance after it had S$1.5 billion orders. The bank is expected to print S$350 million to S$400 million of bonds. Non-call 5 means the issuer will not call or redeem the bonds before year five.
"After a jittery start to the year in the first quarter, we have started to see risk appetite among investors came back strongly, and it has been carried over into this quarter, said Elaine Ngim, head of fixed income, Asia, Union Bancaire Privee.
"Today's a bit special because both are banks," said Terence Lin, assistant director, bonds and portfolio management, iFAST Corporation.
Many recent issues have come from real estate developers and been dominated by private bank investors. Last week, a Frasers Hospitality Reit S$100 million 4.45 per cent issue had S$500 million orders, with private banks taking 65 per cent of the transaction. On Tuesday, G8 Education's three-year S$270 million 5.5 per cent issue also had S$500 million orders with private bank investors accounting for 98 per cent.
Interest rates have stabilised, and the USD/SGD is showing more stability, said Mr Lin. Since March, the Singapore dollar has ranged from S$1.38 to S$1.34, recovering from the January low of S$1.44.
As investors pile in, bond prices are at a high. The Markit iBoxx Singapore corporates return index hit a record 116.0115 on May 10, up 2 per cent year to date.
Samuel Chan, Standard Chartered Bank's executive director, bond syndicate, said private bank sentiment has been buoyant and those who have been under-invested in bonds want to rebalance their portfolio towards high quality assets.
"The bond market has stabilised a fair bit and hence you see more supply coming out," said Clifford Lee, DBS Bank head of fixed income. This trend should continue if the market continues to hold up, he said.
Interest rates have been sliding since the beginning of the year. The five-year swap offer rate (SOR) stood at 2.6 per cent in January, fell to 2.1 per cent late last month and was on Wednesday morning at 1.97 per cent, noted Mr Lin.
The two bank bonds are priced off the five-year SOR.
Todd Schubert, Bank of Singapore's head of fixed income research, said there are several factors driving the recent resurgence in SGD bond issuance.
"Perhaps the most important is a return to the 'lower for longer' belief in interest rates which is an ideal climate for fixed income investment," he said.
While earlier in the year, forecasts were suggesting two or even three rate hikes for 2016 by the US Federal Reserve, current consensus estimates are close to zero for a rate hike next month and only 50/50 by year-end, said Mr Schubert.
"Secondly, cross-currency swap rates make it more cost effective for issuers in currencies such as the euro to issue in SGD and then swap back into euro," he said, referring to Societe Generale's deal.
Year-to-date SGD bond volumes are up 16 per cent to S$8.2 billion.
Said Neel Gopalakrishnan, Credit Suisse Private Banking's Asia-Pacific, emerging markets bond analyst: "Market conditions are favourable for high quality issuers as they can issue bonds at relatively low yields. In our opinion, current valuations of high grade bonds are relatively expensive, driven more by the limited supply of new bonds."
Still investors are discerning and the demand is for quality and familiar credit.
"Risk appetite is still low as credit quality is still a concern for investors in the emerging market space due to economic and political developments," said Mr Gopalakrishnan.
DBS's Mr Lee said there are more higher secondary market activities and more constructive discussions on new deals.
"We are by no means out of the woods, markets are still choppy and cautious but the tone is much better than at the start of the year and hence you see more deals surfacing," he said.
"But as you can see, the new issues are still primarily from repeat issuers and bigger companies," he said, though he is hopeful that there will be issuers from industries aside from banks and real estate coming soon.
Refinancing is of course the other driver for more transactions. Devinda Paranthanthri, UBS Wealth Management bond strategist, noted that recent issuance has picked up due mostly to the refinancing of existing debt and overseas expansion plans of corporates.
In addition, banks have returned to the market to issue subordinated debt, he said.
A UBS report shows that about S$23 billion of bonds will mature over the next two years.
This article was first published on May 12, 2016.
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