Closely watched risk-free rates in the US and Singapore indicate that yields at the long end of the spectrum are rising faster than the short end. For instance, on May 29, the 30-year US treasury yield rose to 4.74%, and it is now above the 10-year US Treasury yield which is at 4.61%. The two-year treasury yield was unchanged at 4.97%. Market watchers put this down to weak demand for the US Treasury’s last auction for the week.
The only data out this week in the US is a revision — if there is any — in 1Q2024 GDP, and the April PCE (personal consumption expenditure) deflator on May 30. The market consensus is for the headline and core reading to be unchanged at 2.7% and 2.8% y-o-y respectively, at the same pace as March. The PCE deflator measures the prices people in the US pay for goods and services.
Partly, the equity market’s performance depends on the trend of risk-free rates. Short-term rebounds notwithstanding, the trend of risk-free rates has flattened in both the US and Singapore. Singapore’s 10-year Singapore Government Securities (SGS) yield at around 3.4% is more than 100 basis points lower than the US, indicating liquidity in the system.
Lower risk-free a boost to CLINT, CLI
This week, in our story Unearthing Value in Property Stocks and REITs, CapitaLand India Trust CY6U (CLINT), a property trust, has emerged as the most undervalued. With global funds’ and strategists’ focus firmly on India, and with CLINT being the most liquid proxy for India locally, its unit price has held up better than the FTSE ST REIT Index.
Although CLINT is at the low end of a three-year price range, its unit price is unchanged y-o-y, and down 8% year-to-date. By contrast, the FTSE ST REIT Index, as at May 29, has fallen 12.2% y-o-y and 10.4% year-to-date.
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Because CLINT’s operations are in India which has a high interest rate regime, the trust lowers its borrowing cost by having a mix of Indian rupee and Singapore dollar borrowings. According to CLINT’s Annual Report 2023, as at end-December 2023, 60% of the Trust’s borrowings were denominated in Indian rupees with the remaining 40% in Singapore dollars. The weighted average interest cost of CLINT’s Singapore dollar and Indian rupee borrowings were 4.2% and 7.7% respectively, with its overall weighted average cost of debt at 6.3% as at December 31, 2023.
CLINT’s income is repatriated semi-annually from India to Singapore. The trust enters into a forward contract monthly to hedge a substantial portion of income. This mitigates the risk of large currency fluctuations in the period before income is repatriated to Singapore.
Elsewhere, CapitaLand Investment’s (CLI) share price has languished for much of 2024. Technically though, the chart pattern looks like a base of sorts. The top of the base is at $2.72, a level that coincides with a secondary downtrend line and the level of the 100-day moving average. Property-based stocks and real estate investment managers have been impacted by lower property valuations. On the other hand, higher risk-free rates have impacted share prices directly through the cost of capital.
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CLI’s price breakout could materialise if the next round of inflation indicators are benign, cementing the likelihood of at least two rate cuts by the US Federal Reserve Board this year. A successful breakout would indicate an upside of $3.05, a level not seen since late 2023.
