With the Federal Reserve expected to lower interest rates in 2024, would it be a good time to invest in bonds? The Singdollar credit market could remain interesting in this market.
Composition of the Singdollar fixed income market
Sizeable market with somewhat diverse issuer profile: The SGD credit market has well over $100 billion in outstanding amounts, comprising bonds, corporate perpetuals, and bank capital. It is roughly split 30-30-20-20 by issuer type between statutory boards, Temasek-linked companies (TLCs), financials and banks, and non-financial corporates.
Low default rates: Most issuers have credit profiles that are either strong or manageable in our view. Aside from losses stemming from Hyflux 600 and the offshore marine sector in the mid-2010s, defaults have been rare. Excluding the statutory boards, most issuers that are TLCs or in the banking or real estate sector have remained resilient thus far.
Total returns in YTD2024 and 2023
Decent returns overall: The Singdollar credit market posted total returns of 7.6% in 2023 and 1.3% in YTD 2024. Almost every segment delivered positive returns, including subordinated papers (e.g., AT1s, non-financial corporate perpetual, Tier 2s), longer-dated papers (e.g., mid and long tenors), and short-tenor papers. By Issuer Profile, only Neutral (5) issuer profile papers delivered negative returns, weighted by the total write-down of the Credit Suisse AT1.
Positioning in 2024
Not underweight in any sector: With rates still high currently and a low incidence of default, we do not have an underweight position in any sector. Conversely, the risk of holding off from investing is reinvestment risk (i.e., investors cannot reinvest at a rate comparable to the existing rate of return), especially if a few companies are willing to issue bonds when rates are still high.
Selectively overweight on corporate perpetuals: While several issuers have previously opted not to redeem perpetuals in 2023, we expect more perpetuals to be redeemed in 2024 and 2025, especially for perpetuals structured with resets. Such redemption could drive outperformance, as it may provide capital gains as several perpetuals trade below par (i.e., below the redemption amount), and investors may redeploy proceeds from the redeemed perpetuals to outstanding perpetuals.
Even if the issuer does not redeem such perpetuals, increased distribution rates (upon reset) may attract demand from credit investors looking for yield.
See also: US bond market halts brutal run as buyers pounce on 4.5% yields
Prefer selective crossover credits: We prefer crossover credits (i.e., borderline investment grade bonds). With the bottom-up analysis done at OCBC Credit Research, we conduct fundamental analysis and pick the companies with stable earnings and bonds that we think will outperform.
A caveat is that our recommendations may change as we adapt to market conditions. Follow our research and latest updates by searching ‘OCBC Research Insights’ on Telegram.
Wong Hong Wei, Andrew Wong, Ezien Hoo and Chin Meng Tee are credit research analysts with OCBC’s Global Markets Research team
