Credit spreads have hit another record low. As of Nov 8, Bloomberg Asia’s US dollar (USD) investment-grade spreads have tightened to yet another record low of 71 basis points, significantly lower than the five-year historical average of 136 basis points (bps).
Credit spreads, which represent the difference in yield between US Treasuries — considered a safe asset — and corporate bonds, which typically carry a higher risk of default, serve as a measure of the additional compensation investors demand for holding corporate bonds.
This tightening can be partly attributed to the “Trump trade”, which began weeks before the US elections and continued afterwards. Market sentiment has shifted to a risk-on stance, fuelled by expectations that President-elect Donald Trump’s presidency will promote stronger economic growth through business-friendly policies.
In addition to the influence of the US election outcome, the anticipated economic recession has not materialised in 2023 or 2024. The US continues to release robust economic data. Although China’s introduction of stimulus measures has been somewhat disappointing to the market, it has contributed to a reduced perception of risk.
Significant month-on-month slowdown in Asia dollar October issuances
Despite tighter credit spreads, Asia dollar issuance in Asia ex-Japan has slowed significantly, reaching only US$15.7 billion ($23.44 billion) in October, compared to US$25.2 billion in September, according to Bloomberg.
This decline can be partly attributed to the Golden Week holiday in China, during which many Chinese issuers typically pause their activities. Furthermore, the subdued issuance volume may reflect rising US Treasury yields, which have led some issuers to postpone their offerings. Investment-grade Asiadollar yield-to-worst (YTW) has increased from about 4.6% in September to around 5.0% by the end of October.
Notably, in October, GLP withdrew a bond deal after failing to generate sufficient demand despite offering a record coupon rate for the issuer. For context, one of Singapore’s investment entities, GIC Private, was previously GLP’s main shareholder before the company was taken private by the Chinese private equity firm China Vanke Co in early 2018.
See also: US bond market halts brutal run as buyers pounce on 4.5% yields
Meanwhile, issuance remains robust in SGD
In contrast to the slowdown in Asia dollar issuance, the SGD credit market has shown remarkable resilience, with $4.25 billion issued in October — significantly up from $1.33 billion in September. While yields on investment-grade bonds in Asia dollars have risen by approximately 40 bps over the past month, yields in SGD have remained relatively stable with a much smaller increase in yield. This stability indicates that it has not become more costly for issuers to price bonds in SGD.
So far, so good for SGD Credit
The Singdollar (SGD) Credit Universe returned 0.07% m-o-m in October. However, the pace of gains has slowed down (September: +1.14% m-o-m). Notably, longer tenors and mid-tenor papers saw negative returns amid higher rates.
Turning neutral on SGD credit, positioning in higher-yielding papers
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Given the significant increase in bond prices year-to-date, we are adjusting our outlook on SGD credit from “positive” to neutral”. While we believe there is still potential for purchasing opportunities as interest rates remain elevated, we currently
prefer to focus on higher-yielding securities, including crossover credits, given the relative resiliency in their fundamental performance.
With credit spreads hovering at or near all-time lows, investors seeking yield may find value in securities that offer wider spreads. However, a caveat is that our recommendations may change as we adapt to the changing conditions in the market.
Stay tuned for our upcoming Credit Outlook 2025, which we will publish later this year.
