Rates are now staying higher for longer. The 10-year US Treasury yield rose 48 basis points (bps) m-o-m in April to 4.68% as at April 30 amid a resilient US economy, corporate earnings, labour markets and stubborn inflation.
The yield softened modestly to 4.47% as at May 6 compared to April 30 against the backdrop of weaker-than-expected macroeconomic data (such as US non-farm payroll, unemployment rate and wage growth). The market is now pricing in merely two rate cuts from the US Federal Reserve this year, a huge contrast to the consensus estimation of six rate cuts made earlier this year.
Amid rate volatility and ongoing geopolitical tensions, credit dispersion increased in the Asiadollar space during April. Bloomberg Asia IG spreads continued to reach new all-time lows, falling below 80 bps on April 10 before finishing the month at 80 bps, tighter by around 6 bps m-o-m. Bloomberg Asia HY spreads however widened by 19 bps m-o-m to 605 bps. As at May 6, Bloomberg Asia IG spreads remained unchanged compared to the end of April, yet Bloomberg Asia HY spreads tightened by 39 bps partly driven by softer economic data in early May.
Against these developments was an increase in primary market activity, according to Bloomberg league tables and OCBC estimates, with US$18.4 billion ($24.95 million) issued through April as at the time of writing, up from US$13.7 billion reported in March. While high-grade credit continues to find favour and investor demand with several large deals, we are seeing some constructive underlying trends as investors search for yield through a more diverse pool of issuers throughout the month. This included issuers from Japan (Rakuten Group Inc, Mitsubishi UFJ Financial Group Inc, Nippon Life Insurance Co), as well as several high-yield energy and commodity-related issuers, possibly taking advantage of the still tight high-yield spreads.
Another development of note is the credit-enhanced issues from Chinese domiciled issuers that provided some of the largest tightening between initial price guidance and final pricing. An example was Guang Ying Investment, whose guarantor is Guangzhou Finance Holdings Group Co, which saw a 55 bps tightening from initial price guidance for its US$150 million two-year bond issued in mid-April. The tighter final pricing reflects the strong liquidity in China’s onshore market as well as solid demand from the investment desks of Chinese banks for these papers.
In addition, borrowing costs for China’s local government financing vehicles (LGFV) have fallen to a record low, as investors’ confidence rose, amidst expectations that authorities will bail out operations that run into trouble, according to Bloomberg.
However, China is still imposing restrictions on domestic investors’ access to their offshore debt. The National Association of Financial Market Institutional Investors (NAFMII), which oversees the interbank market in the country, has stopped accepting new registrations for credit-linked notes. These notes are a type of derivative product that utilises offshore LGFV debt as the underlying assets. Adding to the above developments, Wang Chunying, spokeswoman of the People’s Bank of China and State Administration of Foreign Exchange, mentioned during the month that the regulator will continue to open up China’s bond market and expand its size through increased holdings of Chinese bonds by financial institutions and promotion of domestic bonds to become qualified collateral offshore.
Singapore dollar credit market
The Singdollar primary market similarly slowed with $1.7 billion issued in April, down from $2.8 billion in March. Similar influences were also at play, along with the commencement of earnings announcements. The issuance was highly concentrated with almost 75% coming from just two issuers — HDB, which raised $800 million) and Great Eastern Life Assurance Co, which raised $500 million. Year to April 30, primary issuance volumes in the Singdollar space are up around 44% y-o-y to $10.2 billion, largely due to HDB which has issued three bonds so far in 2024, after issuing only one for the whole of 2023.
The Singdollar credit market continues to provide solid returns despite higher Singdollar Sora yields, which were up 0.29% m-o-m as at April 30, as investors continue to look to the stability and quality of Singdollar credit. Performance was lifted by all segments, especially higher-yield instruments including non-financial corporate perpetuals and bank capital (additional tier 1s and tier 2s). Year to April 30, The Singdollar credit market gained 1.82%, outperforming Asia Dollar Investment Grade Bond (–1.30%) yet underperforming Asia Dollar High Yield Bond(+6.03%). The strong performance of Asia Dollar High Yield Bond on a year-to-date basis was due to the meaningfully tightened spread, which is lower by 175 bps to 605 bps as at April.
See also: US bond market halts brutal run as buyers pounce on 4.5% yields
Based on the flurry of results published in April and early May, most Singdollar bond issuers under our coverage reported stable or positive results. REITs reported stable operating metrics, particularly for the REITs with assets in Singapore. However, most REITs reported lower interest coverage ratios amid higher interest rates and debt costs.
Chin Meng Tee, Andrew Wong, Ezien Hoo and Wong Hong Wei are credit research analysts with OCBC
