Rates are up, bonds are down and investors frown — 2022 was characterised by significant losses of –5.4% for the Singdollar (SGD) credit market, the worst returns in over 10 years. Fast forward to today, the SGD credit market has more than clawed back its losses in 2022, delivering total returns of 6% from January to November (11M2023).
Part of the outperformance is driven by carry, with the rise in interest rates stretching yields of SGD credits to over 4% for high-quality bonds earlier in the year. Subsequently, in November, investors benefited when interest rates tumbled from their peak, like the recoil of a stretched rubber band, due to increasing expectations of Fed Fund rate cuts in 2024.
Demand-supply dynamics is another factor favouring SGD credit holders. New issues dwindled to $16.9 billion in 11M2023 from $24.6 billion in the same period the previous year. Issuances were less forthcoming, as several issuers were averse to locking in rates during high interest rates. Bank loans were preferred, which tended to be shorter in tenor but remained accessible at relatively competitive rates. Meanwhile, demand for SGD credit has remained stable or increased, evidenced by ~60bps (basis points) tightening of credit spreads over 11M2023.
However, the journey has been wild, with significant ups and downs. It was only in March-April this year that the markets were staring at another potential financial crisis. Several financial institutions collapsed, including Silvergate Capital Corp, Silicon Valley Bank and Signature Bank, leading to the fall of the 166-year-old Credit Suisse.
As Credit Suisse was deemed a global systemically important bank (G-SIB), the risk of contagion was heightened, freezing the market for new bank capital issuance. It took more than half a year for the primary markets to recover more fully; in November, UBS, Société Générale and Barclays came back to the USD market to raise new Additional Tier 1 (AT1s) capital. That said, “absence” has strengthened investors’ appetite, attracting significant demand for these new AT1s.
Despite the total write-down of the Credit Suisse AT1s (representing about 7% of the SGD AT1 market), total returns for AT1s in the SGD credit markets for 11M2023 are positive at +1.63%.
The dog of yesteryear has transformed into a market darling, with long-dated issuance posting +9.10% returns in 11M2023. Excluding AT1s, subordinated papers such as non-financial corporate perpetuals and Tier2s have also performed well (with returns around +7%), given their relatively higher distribution levels.
At the time of writing, interest rates are trading lower with further expectations of cuts to the US Fed Funds rate. If such double tightening (interest rates falling, credit spreads falling) continues, 2023 could be the best — if not one of the best years for the SGD credit market.
While it is easier to understand in hindsight, the near-miss in financial contagion serves as a reminder of the potential fragility of confidence, and it remains to be seen if past and current trends can be extrapolated. At OCBC Global Markets Credit Research, we look forward to sharing our 2024 views in our upcoming bi-annual Credit Outlook 2024 publication.
See also: US bond market halts brutal run as buyers pounce on 4.5% yields
Wong Hong Wei, Chin Meng Tee, Andrew Wong and Ezien Hoo are credit analysts with OCBC
