Singapore’s new long bonds will benefit from the global fear factor

(Bloomberg) — Singapore’s first-ever bond sale to fund infrastructure projects is ideally timed, as signs of the global recovery boost demand for highly valued debt.

The new 30-year securities should appeal to investors amid mounting concerns over Chinese bonds during the Evergrande crisis and fears of global growth amid a spate of Covid infections. Yields are also attractive, with those on Singapore’s existing 30-year debt outpacing those on US Treasuries last week.

The Monetary Authority of Singapore will announce on Tuesday how much it plans to raise from the inaugural auction set to take place on September 28. The central bank has already paved the way for issuance with the volume of 15- and 20-year auctions since announcing plans for the new infrastructure bonds in February.

The new securities are the first to be offered in the central bank’s SGS (Infrastructure) category, as opposed to the regular SGS (Market Development) debt and the planned Green SGS (Infrastructure) that it plans to launch next year.

“I expect decent demand,” said Irene Cheung, senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The size of the 15- and 20-year auctions has been scaled back to accommodate, and long-term yields have increased in anticipation of the SGS Infrastructure issue.”

Contagion Fear

One factor that will increase interest in the offer is the crisis at the China Evergrande Group, which is fueling concerns about a possible spillover through the region’s financial markets. The world’s most indebted developer has fallen short of commitments to suppliers, private investors and homebuyers, raising the specter of potential defaults and social unrest.

The Chinese government has also terrified traders with a broad crackdown by regulators in recent months, which has put stocks in the mainland and Hong Kong under pressure.

“If the real estate and technology crackdown results in credit events such as defaults, then an abrupt but painful re-evaluation of risk could lead to contagion,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. If that happens, Singapore’s bonds will be “in a good place to benefit from a revaluation of risk,” he said.

The 30-year sale could also be well received, as Singapore is one of only nine sovereign markets with top ratings from each of the three major rating agencies. The country is also the only AAA-rated market that does not have very negative inflation-adjusted returns.

“In the current environment, there is a scarcity of AAA-rated government bonds,” wrote Eugene Leow, senior interest rate strategist at DBS Bank Ltd. in Singapore, in a note last week. The city’s 30-year yield “ranks among the highest in the world. In any case, the concerns about the lack of demand for maturity turned out to be unfounded,” he said.

The effects also look attractive from another perspective. Yields on the country’s regular 30-year debt climbed above that on US Treasuries for the first time since May 2020 last week.

The auction size also appears to be relatively modest. Both ANZ and DBS estimate that the amount raised will be approximately S$2 billion ($1.48 billion).

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