Singapore’s hottest offering - behind its famous chilli crab - may just be its local currency bonds. Scorching new issuance of Singapore dollar bonds over the last two years comes even as investors’ appetite for fixed income assets globally has been dwindling amid inflationary pressures and rising interest rates.

The deals are being served up hot and fast. One European bank recently raised S$300 million ($224 million) after zealous investors placed orders worth S$2 billion for its bonds, more than six times the issue size, according to brokerage data. Another large lender has sold bonds for S$1 billion in a significantly oversubscribed deal, the bulk of which was snapped up by private bank clients whose demand for Singapore assets is rising.

A fresh breeze

The market for SGD bonds is soaring thanks to a confluence of tailwinds, from capital inflows to currency strength and policy support. For investors, we think this signals the start of a structural step-up for the market, which will continue offering attractive risk-adjusted returns in the near term. Nevertheless, challenges such as liquidity constraints and a lack of a globalised issuer mix remain, and they need to be tackled before Singapore can join the ranks of Asia’s top local-currency bond markets.

As of June 16, three-month SGD government bonds offered an annualised yield of about 4.1 per cent in local currency terms. And, currently, foreign exchange markets could provide investors with an additional pickup should they want to hedge SGD into USD. After hedging, those three-month bills could offer a yield of around 5.5 per cent in USD terms, more than 20 basis points above the yield on three-month Treasury bills.

Already, the value of outstanding SGD bonds has jumped more than 50 per cent over the last three years to around $504 billion, making Singapore the fifth-largest local currency bond market in Asia, according to data from the Asian Development Bank. The top four markets (from largest to smallest) are mainland China, Japan, Korea, and India, ranging in size from around $20 trillion to $1.5 trillion. Before the Covid-19 pandemic, Singapore ranked behind neighbouring Southeast Asian countries like Thailand and Malaysia by outstanding local currency debts.

Capital inflows have accelerated over the last few years, as global and regional investors increasingly view Singapore as “Asia’s Switzerland”. The country’s safe-haven status is underpinned by its top-notch credit ratings. Since receiving an upgrade from Fitch in 2003, Singapore has been boasting an AAA rating from each of the big three global agencies, and it stands as the only AAA-rated country in Asia (not including Australia). As a result of these factors, the country’s local currency deposits have leapt past S$800 billion to a record high this year, while foreign currency deposits have more than tripled in two years through March.

Structural sweeteners

For all its strengths, Singapore’s bond market has remained relatively concentrated. Most of the SGD bonds have been issued by the government and its statutory boards, as well as financial firms. This is typical of an early stage in the natural evolution of a bond market. As a market develops, it deepens, with liquidity rising, and broadens, with a more diverse group of issuers emerging. 

To foster growth in the fixed income market, Singapore has rolled out a series of favourable policies over the last few years. For example, the government subsidised credit ratings for many issuers to encourage high-standard assessments and improve market transparency. Qualifying companies were able to claim up to 100 per cent of their rating expenses, subject to a cap of S$400,000 per issuer, in a programme known as the SGD Credit Rating Grant Scheme, which ran from 2017 through last year. 

Still, the proportion of unrated issuers has stayed relatively high, as many local firms, especially those with government links, have yet to be convinced of the benefit of credit scores relative to their cost. Although many local investors are happy to own unrated bonds based on an issuer’s brand recognition or government ties, credit ratings are necessary to attract global institutional buyers. 

Meanwhile, Singapore has recently imposed a hefty stamp duty on home purchases by foreigners, equivalent to 60 per cent of transaction value. It’s likely that this inhibitive tax will discourage speculation in the housing market and nudge investors toward more traditional capital markets.

Part of the appeal of SGD bonds stems from Singapore’s strong currency, which has been a top performer globally over the last few years. Among major currencies, the Swiss franc, the USD and the SGD - all considered haven assets - have delivered the highest returns since early 2020, according to Bloomberg data.

Singapore has its monetary policy centred on exchange rate management. The country’s central bank ensures that the Singapore Dollar Nominal Effective Exchange Rate (S$NEER), which measures the SGD against a trade-weighted basket of currencies, stays within a policy band. Exchange rates are a more effective monetary tool than interest rates for a country like Singapore to maintain price stability, considering gross exports and imports combined account for more than three times its gross domestic product.

In addition, in terms of broadening and deepening the market, Singapore’s policymakers published a framework for green bonds last year to encourage the issuance of such debts.  The government has announced a plan for the public sector to issue up to S$35 billion of green bonds by 2030, as part of the country’s drive toward reaching net zero greenhouse gas emissions by 2050.

Over the long run, the Singapore market will need more diverse sources of issuance, as well as greater liquidity, to join the ranks of Asian giants such as Japan and Korea. Currently, foreign companies account for less than 10 per cent of market value, while the Singaporean government and local state-backed entities dominate issuance. The overall liquidity in Singapore has improved over recent quarters but remains far below that in Japan and Korea. 

No boom lasts forever, and chilli crab is better served hot. If Singapore can quickly tackle a few key challenges, its bond market may well transform into a choice destination for global fixed-income investors.