So far, so good. The Singapore dollar (SGD) credit market has performed well, delivering total returns of +2.6% from the start of the year to June 26, following good performances in 2H2023 (+3.8%) and 1H2023 (+3.7%). Gains were broad-based though uneven between segments. The outperformers were non-financial corporate perpetuals (+6.1%) and crossover credits in the Neutral (5) Issuer Profile category (+5.9%).
The 1H2024 issuance of $15.6 billion is the highest in recent record, helped by strong demand. Yields are still high with forthcoming supply as spreads are around the tightest level in recent years. After 1H2024, new issues are likely to remain forthcoming.
Positioning in 2H2024
Not underweight on any segment: Unchanged from our 1H2024 views, we are not underweight on any segment. Credit is still resilient as an asset class, supported by the low incidence of default. With overall yields still high, total returns should remain supported.
Prefer very short and short tenors (less than one year to three years): Given the inverted yield curve, short-dated papers offer higher yields and should directly benefit from the expected rate cuts announced by the US Federal Reserve. We are neutral on the belly (more than three years to nine years) and longer tenors for now. That said, we advocate staying nimble and are ready to extend duration should opportunities arise as we expect an increase in long-dated higher-grade supply. In addition, reinvestment risk may re-emerge as a key focus and it will be opportune then to lock in yields.
Prefer crossovers: With an improved funding environment, while default rates are expected to remain low in the SGD credit market, we reiterate our preference for crossover credits. This includes issuers we rate at “neutral (4)” and “neutral (5)” Issuer profiles under our seven-point Issuer Profile Score scale.
See also: Constructive Asiadollar and Singdollar credit markets in 2024
Selectively overweight on structural subordination: Subordinated papers such as non-financial corporate perpetuals and bank capital have already outperformed significantly in 1H2024. While they still offer higher yields than vanilla bonds, we are now largely neutral on this segment given geopolitical tensions and uncertainties on elections. If funding costs increase for bank capital (for example, AT1 of French banks), this can potentially impact corporate perpetuals through spillover effects. That said, we still prefer subordinated papers that are very likely to be redeemed at the first call date, especially those with wide reset spreads.
Overall, we stay constructive on SGD credit in 2H2024. A caveat is that our recommendations may change as we adapt to the changing conditions in the market. Follow our research and our latest updates by searching “OCBC Research Insights” on Telegram.
See also: Citi Wealth says US treasuries at 5% a buy as yields march higher
Wong Hong Wei, Andrew Wong, Ezien Hoo and Chin Meng Tee are credit research analysts with OCBC’s global markets research team
