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Singapore’s bonds are rising at a pace that’s more than 10 times their global peers as a prolonged debt crisis in Europe leaves the island state among just seven countries ranked as top-rated havens.
The securities are poised to return 11.2 percent this year on a U.S.-dollar basis, compared with a 1 percent advance for developed markets including Australia, Canada and the U.S., according to indexes compiled by Bank of America Merrill Lynch. The Singapore dollar has strengthened against 14 of its 16 major counterparts this year as the island's central bank said in April it will allow faster gains to curb inflation.
The gain may draw more investors as Moody’s Investors Service lowered its rating outlooks for Germany to negative last month, further reducing the number of AAA rated sovereigns that aren’t at risk of downgrades. At 5.5 percent, Singapore boasts the world’s biggest budget surplus relative to economic output, adding to demand for its bonds and currency as Europe’s fiscal woes roil global markets.
“Singapore government bond yields offer an attractive position,” said Christian Carrillo, a director and senior rates strategist for Asia Pacific fixed-income securities at BlackRock Inc. (BLK), the world’s largest money manager that oversees $3.56 trillion. “On top of that, you get currency appreciation as well.”
After Germany was given negative outlooks, only seven countries are left with top credit ratings and stable views at the three major credit companies: Moody’s, Standard & Poor’s and Fitch Ratings. Australia, Canada, Denmark, Norway, Sweden and Switzerland join Singapore on that list, according to data compiled by Bloomberg. S&P stripped the U.S. of its top rating a year ago.
Singapore had S$141.3 billion ($113 billion) of outstanding securities as of July, according to central bank figures. Canada has the biggest outstanding debt among the seven nations with $883 billion, followed by Australia’s $252 billion, according to data compiled by Bloomberg. The U.S. debt is more than 90 times bigger than Singapore’s, the data show.
The city state’s benchmark 10-year note yield slid to a record low of 1.32 percent on July 25, according to Monetary Authority of Singapore data going back to 1998. The rate has fallen 22 basis points this year and stood at 1.43 percent yesterday.
Singapore’s budget surplus is equivalent to 5.5 percent of gross domestic product this year after adjusting for extraordinary items, according to estimates by the International Monetary Fund, the most among nations it tracks. Canada has a deficit equivalent to 2.8 percent of its economic output, while Australia’s deficit-to-GDP ratio is 2.5 percent.
“Unlike many other countries, the Singapore government does not need to finance its expenditures through the issuance of government bonds,” the central bank said on its website. Bond sales allow “the government to focus on the development of Singapore’s capital markets instead,” it said.
Trading volumes of government bonds increased 11-fold since 1988 with securities valued at S$3.05 billion changing hands daily in July, data from the MAS show.
“In a fully-functioning open capital market, the government bond curve will form a benchmark” for interest-rate swaps and corporate borrowing, said Sim Buck Khim, co-head of capital markets at Oversea-Chinese Banking Corp., one of the 13 primary dealers that underwrite government bond issuance. “Efforts to develop the Singapore government securities market are certainly a step in the right direction.”
A total of 56 businesses and organizations sold S$19.8 billion of Singapore dollar bonds this year, based on data compiled by Bloomberg, 19 percent more than the amount offered in 2011 and a threefold gain from the past decade.
Singapore is also drawing foreign issuers. VTB Group, Russia’s No. 2 bank, sold S$400 million of three-year notes last month to reduce U.S. dollar borrowings.
“The Singapore market has become more relevant as a viable alternative to the U.S. dollar market,” said Clifford Lee, head of fixed income at DBS Group Holdings Ltd., Southeast Asia’s biggest lender. “Regulators encourage the development of the markets here and it’s been made to be very open.”
With prices near record highs, government securities at all maturities yield less than the inflation rate, damping their values. Singapore’s consumer prices rose 5.3 percent in June from a year earlier, the fastest pace in Southeast Asia after Vietnam, prompting the government to consider selling inflation- linked debt to help citizens boost returns on savings.
The nation’s economic growth will probably accelerate to 3.9 percent next year from 2.7 percent in 2012, the IMF forecast in its World Economic Outlook report in April. The advanced economies are estimated to expand 2 percent in 2013.
The 10-year yield may climb to 1.74 percent by year-end, according to economist estimates compiled by Bloomberg. Based on that forecast, investors who bought the securities yesterday would lose 2 percent.
The rally in bonds also trails gains in stocks. The benchmark Straits Times Index (FSSTI) climbed 20 percent this year in U.S. dollar terms, the most among developed markets after Denmark, according to data compiled by Bloomberg.
“The triple AAA space has become more limited, so you can see there are a lot of safe-haven flows” into Singapore, said Alvin Liew, a senior economist at United Overseas Bank Ltd. (UOB), another primary dealer. The nation’s bonds are more of a safe asset “rather than a function of Singapore’s current inflation outlook,” he said.
The MAS guides the local dollar against a basket of currencies within an undisclosed band. The local currency has appreciated 3.6 percent in 2012 against the U.S. dollar, after reaching a three-month high of S$1.24 on Aug. 6. The currency may strengthen to S$1.21 next year, according to a Bloomberg survey of economists.
The MAS is “likely to continue to keep currency appreciation as a tool to prevent further inflationary pressures,” said BlackRock’s Carrillo. That will make “government bonds attractive in the inflationary environment, especially for foreign investors.”
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