Investors seek safe havens, snap up S'pore govt bonds

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By EMILYN YAP

(SINGAPORE) The popularity of Singapore government bonds has surged in recent weeks as investors seek refuge in safe havens, while playing on the appreciating Singapore dollar.

The signs? Bond yields have fallen to record lows almost across the board as bond prices rise on the back of strong demand. The drop in yields was particularly evident yesterday.

The yield of 10-year Singapore Government Securities (SGS) sank from Monday's 1.81 per cent to 1.62 per cent - beating the previous trough of 1.72 per cent in January 2009 when the world was reeling from the financial crisis.

The 20-year SGS yield dipped from Monday's 2.54 per cent to 2.38 per cent - again breaching an earlier bottom of 2.5 per cent. The 5-year and 15-year bond yields also reached new lows.

Several factors have driven investors towards Singapore government bonds. The eurozone debt crisis continues to fester, while the US flirted with a debt default earlier this month as politicians fought over plans to raise the government's borrowing limit.

The safest haven in the ongoing flight to quality would be to AAA-rated countries outside of the Western hemisphere.

- OCBC economist Selena Ling

But what really roiled sentiment this week was Standard & Poor's (S&P) cutting the US credit rating to AA+ from AAA. This has burnished the attractiveness of Singapore government bonds, backed by the country's AAA credit rating.

With debt problems in the US and European Union, coupled with fears of a double-dip recession, 'the safest haven in the ongoing flight to quality would be to AAA-rated countries outside of the Western hemisphere', said OCBC economist Selena Ling.

Supporting this view, doubts have surfaced over the stability of other developed nations' credit ratings. In a report on Tuesday, Citigroup chief economist Willem Buiter went so far as to say that other AAA-rated Group of Seven (G-7) sovereigns face risks of a downgrade.

In France, especially, public debt is high and there is popular resistance to welfare cutbacks.

'We could be moving towards a world without AAA G-7 sovereigns,' he suggested. 'The criteria applied by the rating agencies to the G-7 sovereigns in the past have been, in our view, far too lenient.'

What makes Singapore government bonds stand out further is the strengthening Sing dollar.

To cap inflation, the Monetary Authority of Singapore (MAS) has allowed the currency to rise and it has increased by around 10 per cent against the US dollar in the last one year.

'In a world where AAA-rated sovereigns are becoming scarcer, we would not be surprised if real money players and even reserve money managers have increasingly diversified into SGD assets,' said Citi economist Kit Wei Zheng in a report last Friday.

Market watchers see demand for Singapore government bonds remaining strong if financial markets stay choppy, and if MAS maintains or tightens monetary policy.

Nevertheless, 'I would also caution against hopping on the SGS bandwagon at this juncture since real interest rates are currently in deeply negative territory', OCBC's Ms Ling said.

Singapore's consumer price index rose 5.2 per cent in June over the previous year.

SGS yields were not the only rates which dropped yesterday. United Overseas Bank (UOB) noted that short-term Swap Offer Rates (SOR) fell into negative territory for the first time - the three-month SOR, for instance, hit minus 0.0119 per cent.

Economists Chow Penn Nee and Suan Teck Kin cited several factors for this: the US Federal Reserve indicated that it would keep the federal funds rate low till mid-2013; the US dollar is expected to weaken against the Sing dollar in the coming months; and investors will continue to flock to safe havens such as Singapore.

'With all these concerns still likely to persist in the short to medium term, this will exert a downward pressure on SOR,' they said.

The three-month SOR is a popular benchmark used for home loans, and so is the three-month Singapore Interbank Offered Rate or Sibor. The latter remained unchanged yesterday.