SGD Rates and Bonds Weekly
Economic News
Apr PMI 50.3 vs expected 50.3 previous 50.6
Apr Electronics Sector Index 51.2 vs expected 51.3 previous 51.9
IRS
Market still in the doldrums as trading interest remains anemic. USDSGD broke under 1.23 briefly before holding the level as it has been for the past week with some talk in the market that the JPY weight in the SGD Neer was reduced recently.
Long end rates bounced back strongly from their 7 months low last week after the buoyant US NFP and Malaysian election results. Paying interest concentrated in the long ends, while the 6M SOR fixed in a tight 0.38-.0.39 range.
The curve steepening is healthy and in line with the new highs attained in the STI Index which is trading at its highest since 2007. The strength of the equity market has been ignored by the rate world in a twin market rally which begs the question on how long the situation will remain sustainable.
As the complacency continues, I suspect we could see another leg down in rates with the moving averages crossing to the downside which is quite pointless to play for given the illiquidity in the marketplace. That dip should present decent paying opportunity, on the other hand relative to the USD curve.
Bonds
Month end rebalancing kept market busy earlier in the week with local banks all seen on the bids for the 5Y and the long end 20-30Y papers. Signs of offshore buying also emerging in the 5Y tenors.
Market sold off fast led by another local bank into the US numbers on Friday and thereafter causing yields to rise along with the UST yields. The 10 and 15Y SGS, worst performers after hitting their lows for the year earlier last week when the STI broke its 5 year high.
The sharp and sudden spike in yields is approaching resistance levels. By that I mean the sudden plunge at the end of March when yield collapsed. Still no reason to see a rush for the exit as yet given weak global economic outlook and calls for a prolonged era of low rates. Thus it would be prudent to be on the lookout for buying opportunities going ahead.
Corporate Bonds
Guocoland 7Y SGD 125 mio 4.1% SOR+295 bp ~ swap neutral
Trikomsel 3Y SGD 115 mio 5.25% SOR+475 bp ~ potential swap into USD
Cheap SGD bond alert:
UniCredit SGD 5.5% 18-23 $94-$95 now…yet remains cheap. Why?
UniCredit USD 6.375% 18-23 got issued recently and is trading at $102 – that’s 5.90% yield to call..and the SGD bonds are 6.70% to Call! On a US$ adjusted basis, that’s 60-70bps
cheaper (2-2½ points).
Even after factoring wider bid-ask currently for the SGD, still appears value.
UniCredit Sub 5y CDS currently 450/470… has rallied 225 bps since April!
Probably on the overhang in the market.
Even the Olam USD bond is outperforming its SGD equivalent.
GeneraI observation that SGD bonds seem to have stickier price action than USD counterparts, both on upside and downside. That includes SGS vs US Treasuries. Apathy?
Yes.
First world country but market more like a developing nation’s.
Is unicredit bond really cheap? What are the chances of Italy’s biggest bank going bust within 10 years? Yes, their finances are improving but as someone living in Singapore, I cant really see how their businesses are performing… other than from their financial reports.
Although the yield is tempting, I am thinking hard about going into this. What are your thoughts? Cheap on a risk-adjusted basis?
Cheap if you are a trader, hedge fund or professional investor who all have the means to escape or arbitrage the difference.
I am not a financial advisor so I cannot really give a 5 year buy call except that is looks relatively good compared to its USD and EUR equivalents.
UniCredit:
1) Those chances are at least somewhat reflected in current yield;
2) Due to (1), don’t Buy & Hold, instead Buy To Flip as there is room for risk premium to tighten on a relative value basis
Fwiw, $94.50-$94.75 now (bid side +$0.50 from yesterday)
ECB looking to buy bad assets from southern European economies… enough said.
I did post about Unicredit previously…. Definitely not buy and hold BUT good upside for flipping.
I went in at $93 and never look back. If it reach $98, I will make a decent return which I think it is highly possible before end of the year.
Personal opinion only.
Good on you !
i am not looking to flip but hold.. unless it goes up significantly.. still assessing whether it is worth the risk..
Considering that it is the only bond issued this year to sink so low, you should assess carefully because it is at least a 5 year paper. And now that it is under water, remember the call in 2018 is at 100. So you should treat it as a 10 year investment !
I see it going at 94.25/95.25 today.
For retail, simpler to regard UniCredit SGD LT2 as Structured Note linked to Italian govt bonds with leverage quanto into SGD
What do you mean by “with leverage quanto into SGD”? Italian 10 year govt bonds going for about 4%. Even if you see it as a 10 year paper, Unicredit is yielding at 6%. As the saying goes, if Unicredit falls, Italy falls and vice versa. Relative pricing wise, it looks attractive.
The problem I face is that I cannot directly compare this to other SGD 10 year corporate bonds. Take for example the recent First Reit issue. 5 year paper going for about 4% now. Unrated issuer, unrated bond. Indonesia is barely investment grade BBB- thereabouts. Italy is just one/two notches above Indonesia and yet if you the yields of Unicredit and First Reit are so far apart.
Of course, it is an unfair comparison since they are in different sectors etc. I am trying to evaluate whether Unicredit is an attractive proposition or not. Maybe there are hidden risks that we as retail investors do not know about? If not, institutional investors / hedge funds etc would have gladly snap up the bonds. Any people here vested in Unicredit bond?
Generally, banks will be one of the biggest holders of their host country’s government bonds. American banks will hold US Treasuries, Singaporean banks will hold Singapore government bonds, etc. Even more so if the banks are not lending to the private sector but instead deploying cash into government bonds.
That’s the current scenario with Italian banks including Unicredit. As you point out, yields on their securities will be correlated positively to Italian government bond yields and more so with the subordinated ranking. Hence 6% vs 4%.
(Singapore doesn’t yet have a sovereign debt crisis, so I suppose Singapore bank securities are a structured note linked to Singapore real estate.)