Singapore government bonds benefitting in low-yield world: DBS, Banking & Finance

Fri, Aug 16, 2019 – 11:40 AM

THE global low-yield environment will continue to bode well for Singapore Government Securities (SGS) bonds, said Eugene Leow, rates strategist at DBS Group Research, on Friday.

In particular, the long end of the SGS curve has been the major beneficiary, with benchmark 30-year SGS bond yields down by almost 70 basis points (bps) since June to an all-time low of 1.87 per cent as at Thursday. The 30-year yield stood at 2.54 per cent on June 3. A falling yield indicates improving demand for the bond.

“However, the short end of the SGS curve was kept elevated, due to still-tight liquidity and increasing speculation of easing by the Monetary Authority of Singapore (MAS) in October,” Mr Leow said.

The benchmark 2-year SGS bond yield has fallen just 22 bps to 1.66 per cent as at Thursday, from 1.88 per cent at the start of June.

Conditions supporting SGS bonds are still firmly in place, Mr Leow noted.

“Flight to safety amid heightened economic uncertainties at a time when yield (in the developed-markets world) is scarce suggest that investors have limited alternatives,” he said.

Moreover, SGS bonds still offer one of the highest yields in the developed world, comparable to the US, Mr Leow added.

With US Treasury bond yields still displaying downside momentum, SGS yields will “inevitably” follow, Mr Leow said.

For instance, the 10-year US Treasury bond yield briefly breached 1.5 per cent during trading on Thursday, before closing at 1.52 per cent. That is a 55 bps drop from 2.07 per cent on June 3.

Moreover, the upcoming issuance calendar is light in the Singapore market.

Other than the 10-year SGS bond auction on Aug 28, there are only two others scheduled to contend with: the 2-year tenor on Sept 26 and the 7-year tenor in Oct 29.

The 10-year and 20-year bonds are likely to see strong demand, Mr Leow said. This is because the 10-year bond now looks relatively cheap compared to the 30-year bond, with the spread between 10-year and 30-year narrowing by almost 40 bps in less than three months.

“Amid tight liquidity, bond-swap spreads are inverted across multiple tenors. There may be scope for the SGS-swap spread to narrow (turn less negative) in the 5-year and 20-year segments where the spreads look wide,” he added.

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