Local bond market to get boost with new framework

Seasoning framework will help retail investors tap wider range of bonds, says SGX

Moves by an increasing number of firms to issue retail bonds to diversify their fund sources and rising interest from investors have perked up the market for such products.

These "positive trends" noted by the Singapore Exchange (SGX) should continue next year with the introduction of what is called the bond seasoning framework.

The SGX told The Straits Times: "This framework will allow retail investors to tap a greater selection of bonds issued by eligible issuers without a prospectus after the bonds have been listed for six months.

"To facilitate retail investments, such bonds are denominated in smaller lot sizes."

Nine retail bonds are listed on the SGX, of which four were issued this year, raising about $1.25 billion in all. Most of these bonds require a minimum investment of $1,000 and were offering a yield of between 2.6 and 5.2 per cent as at Dec 29.

DBS Bank, which was involved in all four issues this year - Oxley Holdings, Perennial Real Estate, Frasers Centrepoint and Aspial Corporation - said the new framework will ease disclosure requirements on corporates and could pave the way for more retail bonds next year.

DBS fixed-income head Clifford Lee said: "The four successful issues that we saw this year have given the market more transparency than before, and have again affirmed that retail investors continue to be interested in bond offerings of appropriate credit and appropriate returns."

Growing the bond market will not be unfamiliar to new SGX chief executive Loh Boon Chye, who had extensive experience in capital markets prior to his appointment in June.

But achieving sufficient depth in the market means more retail bonds, say analysts.

So far, demand has outpaced supply: All four retail bonds offered this year were oversubscribed and were issued beyond their original offering sizes.

"Retail investors are hungry for yield in the current low interest rate environment. The trading volume in the secondary market remains relatively thin," said Ms Chung Shaw Bee, head of wealth management for Singapore and the region at United Overseas Bank.

"This suggests that investors are buying to hold for yield."

UOB sees selective opportunities for retail bonds next year, potentially from refinancing of debt or from corporates seeking funding for mergers and acquisitions.

Mr Tan Kee Phong, OCBC Bank's head of capital markets, estimates that $13 billion in Singdollar bonds and US$33 billion (S$46.6 billion) in Singapore syndicated loans will likely mature next year.

However, prospective bond issuers will have to consider the spectre of rising interest rates in coming years, following the rate hike in the United States earlier this month.

NRA Capital director of research Liu Jinshu said that "the new bonds will have to be priced to reflect higher long-term interest rates or offer shorter maturities in order to be attractive to investors".

Analysts expect retail bonds to continue to find favour with investors next year. But they noted that investors should be aware bond prices are inversely related with interest rates. That means prices will weaken when interest rates go up.

"Bonds with longer tenor tend to be more vulnerable to rising interest rates, which is why those looking to buy bonds can reduce the downside risk by buying bonds with shorter tenor of up to four or five years," said Mr Vasu Menon, senior investment strategist, wealth management Singapore, at OCBC Bank.

Apart from the interest rate risk, investors should be mindful that there may be no buyers when they are ready to sell their bonds in the secondary market.

It is also imperative that investors assess the credit standing and the current and future cash flows of the bond issuer, especially if they intend to hold the bond to maturity.

SingCapital chief executive Alfred Chia said the "utmost important risk investors face is the possibility of the bond issuer going bust and defaulting on bond payments".

Despite the risks, analysts believe retail bonds are well worth considering as part of a balanced portfolio as they are considered to be generally less volatile than equities.

The TR/SGX SFI Corporate Bond Index rose 1.73 per cent in the Jan 1 to Dec 29 period - a tiny rise but streets ahead of the Straits Times Index, which slumped 14.28 per cent.

"Retail bonds have better yields with fixed return flows via coupon payments as compared to deposits... Compared to having a single-asset investment, holding a diverse range of investments could provide improved risk-adjusted returns," noted Mr Matthew Colebrook, head of retail banking and wealth management at HSBC Singapore.

Apart from retail bonds, investors can also consider retail preference shares. SGX said six retail preference shares are listed on the exchange, offering a yield of between 4.5 and 5.8 per cent as at Dec 29.

Another option for retail investors is the Singapore Savings Bonds (SSBs), which were launched in October, offering a safe long-term investment option.

The take-up rate for SSBs has been tepid as the yield is seen as less attractive than other options. SSB yields ranged from 2.44 to 2.78 per cent for the first three issues.

However, analysts warned against simply chasing after offerings with the highest yield.

"Tightening lending conditions and slower economic growth mean credit quality will become much more important," said Mr Manpreet Singh Gill, senior investment strategist at Standard Chartered Bank.


This article was first published on Dec 30, 2015.
Get a copy of The Straits Times or go to straitstimes.com for more stories.