(Dec 18): Singapore sovereign-bond sensitivity to Treasuries has declined, an indication that investors are looking for alternatives to dollar assets.
Moves in the two markets have become almost independent of each other, after their correlation fell to nearly zero. Singapore’s fiscal discipline is boosting the appeal of its AAA-rated bonds which are graded above Treasuries amid concern over government finances in the US.
This decoupling bodes well for Singapore’s bonds with US Treasuries vulnerable to increased volatility, as worries about the Federal Reserve’s independence resurface in the run-up to the appointment of a new central bank chair. Singapore’s bonds also stand out as fiscal concerns send yields from Japan to Germany soaring.
Investors can “find a safe harbour” in Singapore’s bonds in the face of de-dollarisation, said Kheng Siang Ng, Asia-Pacific head of fixed income at State Street Investment Management. “Singapore is an anchor of stability,” he said.
Historically, however, bond markets in Singapore and the US have been closely linked due to the lack of an interest-rate anchor in the Asian nation which uses an exchange rate-based monetary policy. This link broke down in the latter part of this year due to haven demand for Singapore’s bonds.
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The 120-day correlation between 10-year Singapore government bonds and similar-dated Treasuries has fallen to 0 from 0.40 at the start of the year. This correlation fell to as low as minus 0.07 in late November, the lowest since 2015.
The strong global demand driving this correlation breakdown has boosted domestic liquidity, pushing down the cost of borrowing in the interbank market close to the lowest levels in three years. The flush cash levels may continue to support bond performance, with a Bloomberg index of Singapore bonds offering returns of nearly 14% this year to dollar-based investors, on track for the best performance since 2002.
“We are seeing increasing interest in high-quality investment grade Asia local currency bonds, as investors look for USD investment alternatives,” said Belinda Liao, a portfolio manager at Fidelity International.
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“Singapore government bonds will maintain the safe-haven status and continue to attract foreign investment,” she said.
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