Risk-off sentiments continued to prevail in a month plagued by hawkish Fedspeak urging for monetary policy to be tightened into restrictive areas as well as persistent inflation, with 10-year US treasury yields consequently peaking at 4.24% as at Oct 24, a level not seen since 2008. Ten-year US treasury yields rose for a third consecutive month, by 22 basis points overall from last month, to reach 4.05% as at Oct 31.
Despite contagion fears from the UK gilts market spreading swiftly to the US treasury market in early October, several US Federal Reserve officials commented that the Fed will not be deterred by financial market turbulence.
Around the same time, the financial health of European banks, led by Credit Suisse Group, dominated credit markets, following a rise in the cost of its credit default swaps that was exacerbated by a social media frenzy. Subsequently, two key US economic data releases, which showed a tight labour market with the unemployment rate still languishing at historic lows of 3.5% in September and coupled with a hot core inflation print for September, cemented prospects of a fourth consecutive 75-basis-point rate hike in November.
US primary markets issuance volumes in October continued to be hampered by the rise in funding costs, although US investment-grade issuances rose slightly to US$85.7 billion ($121.1 billion), increasing by 4% versus the previous month and down 29% versus the same time last year. US high-yield issuances came in at US$4.9 billion, down 41% versus the previous month and 86% versus the same time last year.
While some of the events in October were arguably self-inflicted, the fact that they swept up global markets so swiftly signals a market that is primed to react to negative developments. The key lessons for us are that firstly, the days of easy money are over, with capital more expensive and likely to stay that way for some time. The second lesson is that growth plans need to be thought through, backed up by a proper funding strategy and properly communicated to investors.
Soul-searching in Asiadollar
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We observe that the majority of new primary issuance in the Asiadollar space in September benefitted from some form of implicit or explicit external credit support (indirect or direct government ownership, bank or parental guarantees, and standby letters of credit), and issuances backed by creditsupport had carried through into October.
In our view, high-grade issuers are still able to tap the market, albeit at a higher cost of funding, though the high-yield market, where China property developers are a key feature, is going through a structural change. Despite a thawed onshore bond issuance market for selected developers, the market saw one high-profile default in October and another developer announcing that it will likely default on its USD bond in November. This had led to sharp sell-offs, including bonds from Chinese property developer issuers, which until recent weeks were perceived to be among the strongest names in the sector that had a chance to ride through the market rout.
We think this would implicate the funding accessibility of Asiadollar high-yield issuers, even if their business is not related to China property. In October, Asiadollar space issuance volume fell to US$6.75 billion, declining 35% versus last month and lower by 80% versus same time last year. Recent large deals continue to be done by sovereigns, echoing the trend observed in September, with government bonds representing US$2.8 billion or 42% of new issuance volume in October.
See also: 1H2024 outlook for Singapore credit: Bye or buy?
Hesitancy in the Singdollar bond market
In September, Frasers Property priced $500 million of five-year senior unsecured green bonds despite challenging markets, deftly navigating the Singapore retail bond market to complete the transaction.
In our view, the retail bond market has been an underutilised channel of funding for corporates, while there was a long period of flushed liquidity from the institutional market.
Since that deal, there has only been one major issuance in October. This came from the Housing & Development Board, which priced $1.2 billion of five-year senior unsecured green bonds at 4.09%, culminating in a total of $1.53 billion priced during the month (33% lower than September and 50% lower than the same time last year). That said, there are still high-quality issuers who are waiting on the sidelines for a window of opportunity to tap the market for diversification of funding sources and lock-in funding costs.
Within expectations, Mapletree Investments did not issue a notice of redemption within the stipulated timeframe required for a call to happen on Nov 12, and we do not expect this issuer to call its $700 million MAPLSP 3.95%-PERP. The first reset date only occurs in November 2027 (first call and first reset date do not coincide) and as such, the distribution rates will stay at 3% per annum till the reset date. As a point of comparison, Singapore’s most recent six-month Treasury bill was priced at a cut-off yield of 4.19%. Earlier in the month, ESR-LOGOS Logistics Trust announced that it will not redeem its $150 million EREIT 4.6%-PERP, allowing the perpetual distribution rates to reset upwards instead.
As of writing, investors in these hybrid instruments will get paid more, as the distribution rate is likely to exceed 6% per annum. In our view, non-calls year-to-date were mainly due to cost savings reasons rather than inability to access funding. The lack of broadly distributed primary issuances in recent weeks could mean that new issue premiums demanded by investors (including risk premium to compensate for rates volatility) are likely to increase the cost of funding. Perpetual resets are particularly valuable in this interest rate environment, and we continue to favour perpetuals with a wide reset spread that have a higher certainty of a call in the shorter term.
Investors to focus on credit risk as risk of economic slowdown rises
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Moving ahead, investors and central bankers alike continue to look for signs of inflation downshift and the need for policy recalibration. Despite the Fed’s largely united hawkish front advocating for rates to be “higher for longer”, several Fed officials of late have warned against over-tightening and signalled the need to be even more data-dependent going forward. Consequently, market expectations for another 75-basis-point rate hike at December’s meeting have come off somewhat since mid-October. Risk-off sentiments could possibly start to taper off should expectations of peak rates materialise.
With inflation and the interest rates trajectory uncertain, we prefer staying in shorter-dated bullets in the crossover space where credit risk is more manageable, as well as selective bank capital on sound fundamentals and regulatory oversight. While returns on cash and near-cash have not been compelling in the previously low-rate environment, these have been repriced upwards in recent weeks and are becoming a viable alternative to corporate credit.
In our view, this means further scope for corporate credit yields to rise. A slower growth environment alone does not guarantee that the Fed will start cutting rates, especially if inflation stays stubborn and policymakers are left with little choice. While we think it is too early to call for a Fed pivot into cutting rates, bonds and corporate credit could become attractive, with opportunities to add longer-duration positions should spreads and rates continue to widen significantly and rates stabilise at a new normal six to nine months out.
Ezien Hoo, Andrew Wong and Wong Hong Wei are credit research analysts at OCBC Bank’s Global Treasury Research & Strategy. Wong Yu Le is an intern with the team
