The Monetary Authority of Singapore’s reliance on exchange rate as the monetary policy tool to fight inflation is bringing rich dividends for bond investors.
The city state’s sovereign bonds have gained 1.9% in October, the most since April 2020 and are the third-best performers among the 24 markets that make up the FTSE Russell’s World Government Bond Index. Yields on Singapore’s two- and five-year notes have fallen faster than other tenors.
The MAS’s fight against inflation has been supportive for local debt as the authority uses the exchange rate rather than interest rates. This is in stark contrast with other bond markets that have seen yields soar on higher policy rates. Limited supply of government securities has also augured well for Singapore’s market unlike others such as the UK, where unfunded tax cuts sparked a meltdown in gilts.
Singapore’s dollar has weakened more than 4% against the greenback this year, but the former’s nominal effective exchange rate has gained just as much. The MAS tightened the currency policy early this month for a fourth time this year as core inflation quickened to the fastest since 2008.
While the city state’s bonds could remain resilient in the rising yield environment globally, they may lag behind peers once overseas markets turn around, according to Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore.
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“Singapore government securities may continue to outperform if US Treasury yields rise further,” he said. “Conversely, if US Treasury yields plunge on global risk-off, then the negative spreads between SGS and UST will narrow.”
