Special feature: Singapore dollar bonds: Duration management is key amid policy flux
Look past the latest Covid-19 outbreak and inflation talk to appreciate the stable long-term income potential from Singapore dollar (SGD) bonds, says PineBridge Investments’ portfolio manager Omar Slim, CFA. Slim, who covers the SGD bond market for the firm, says careful credit selection and active management remain key to enhanced returns particularly when global policies are poised to shift. Here, he answers questions about the outlook of the local bond market, opportunities, positioning, and global developments to watch out for.
How has the latest local Covid-19 outbreak impacted your forecast this year for the Singapore economy?
Barring a prolonged lockdown due to an increase in local Covid-19 infections, we continue to expect a strong, albeit uneven recovery in the economy. This is already evident on corporate earnings, which are showing signs of strong recovery and stabilisation.
With monetary policy still largely accommodative and fiscal assistance available to the vulnerable pockets of the economy, signs are pointing towards a strong year. If we look at Singapore government bonds, they continue to perform well relative to other developed market government bonds, underscoring this economic resilience.
There is a lot of talk about inflation in global fixed income markets, particularly in the US. How would a pickup in US inflation impact the local bond market? Should there be cause for concern?
Inflation is almost certain to go up this year in a number of major economies. This is driven by a number of factors, including base effects, abundant liquidity, a tightening labor market, some supply chain bottlenecks and a strong broad economic recovery. Singapore will be no exception to this trend but we think inflation will remain generally subdued.
Globally, what developments are you watching that could have material impact on the local market?
The pandemic remains the dominant market theme. In Asia and Singapore, despite some setbacks, economic data and corporate earnings continue to be robust from the region. Vaccination progress in the developed world is encouraging and should support global growth recovery going forward. Singapore’s vaccination programme is successful so far, and we expect growing momentum for opening up the economy and a gradual border re-opening later this year.
As the economic recovery strengthens and broadens, we expect some back up in yields which has and will affect the SGD bond market. We think the bulk of the move is done but we remain more cautious on duration or interest rate risk.
Why should investors consider SGD bonds and how should they approach the opportunity?
SGD bonds continue to offer stable income for local investors. For income seekers, SGD bonds can potentially offer an enhanced income without the foreign exchange risk from investing in offshore bonds.
Moreover, the market is diverse in terms of credit risk, from the triple A-rated government bonds and quasi-sovereign issues to corporate issues. The corporate market itself is diverse in terms of sectors, industries, and credit profiles.
Given the uneven economic recovery, we expect high return dispersion, which is suitable for active credit selection. The corporate bond market, for example, offers a lot of room for duration and curve management. In general, Asian bonds have lower duration than US investment grade, so we think the local market can buffer any potential interest rate hike, which should be beneficial for investors in the near term.
How are you positioned going forward?
Our base case is generally playing out. We expected that this year will witness a sharp economic recovery, but it will be uneven and incomplete. We continue to favour high-quality investment grade corporate bonds while staying cautious on our duration positioning.
Although the SGD bond market is primarily of high quality and we focus on high credit quality issues, we continue to be more selective in our industry and issuer selection, still shying away from sectors that are directly impacted by the pandemic. However, we believe that the latest restrictions would have less of an economic impact than the circuit breaker last year.
The primary market has been quite active this year. With SINGA bonds coming later this year, what would be the impact of this increased supply in the market?
The SINGA bonds will increase the quasi-sovereign supply and lengthen duration in general as these are long-dated bonds. We would have to look at where the valuations are. Statutory boards have very strong credit profiles and long-dated bonds are scarce in the market.
What is your forecast on the SGD/USD exchange rate?
Broadly, we think the Monetary Authority of Singapore (MAS) will maintain current policy in place. We think the SGD will trade between 1.32 to 1.36 against the USD in the foreseeable future. The SGD should strengthen in long run unless we see a major deterioration in economic fundamentals, which we don’t think is likely at this point.