This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading !


Missing from my mailbox in the new year are all the corporate bond recommendations that I was inundated with last year, that told me to reach for yield and buy those 2-3 year corporate bonds that give 4-6% because they cannot go wrong.

And thus 2014 went by, with the most unimaginable names getting away with the lowest funding rates, a short burst of a rally and a fizzle into year end.

It is not starting out all too rosy for SGD corporate bonds as we notice the dearth of strategies from our bankers, wisely keeping a low profile for all the trades gone sour last year to probably resurface with a new theme song for 2015.

I have been put in the spot on numerous occasions over the innocent rounds of festive merriment. What bonds to buy ? What tenors ? What is a cheap and good and fail safe trade ?

Yes, and nobody believed me when I say nothing much because everyone believes that money grows on trees and there is a pot of gold behind every corner of the marketplace.

The skeptics, on the other hand, are on a lookout for the defaults and the credit crisis that would cheapen prices further for opportunistic buying.

That, too, I disagree with.

Plausible reasons for local market distress :

  • 4 year high – 1M and 3M SIBOR, 1Y-3Y interest rate swaps (with 4Y nearly there) and the USDSGD.
  • 5 year high – 1M,3M and 6M SOR.
  • Delayed oil price impact on corporate performance
  • Contagion stemming from global geopolitical uncertainties in eg. Greece
  • Contagion stemming from global sovereign risks eg. Russia, Venezuela
  • Contagion stemming from global credit risks

While we are more certain of a slowdown in Singapore for 2015 as GDP grew less than forecast in 4Q14 {http://www.businesstimes.com.sg/government-economy/singapore-gdp-grows-15-year-on-year-in-q4-2014-as-manufacturing-shrinks}, we have to be cognizant that expecting currency weakening would lead to higher interest rates in the short term as opposed to countries operating on monetary policy mechanisms as Singapore runs a foreign exchange policy.

Higher funding rates could potentially lead to isolated distressed liquidations on margin calls but is unlikely to be widespread.

If oil prices take another dip and oil related stock prices adjust lower, credit spreads would be affected which would drive related bond prices lower.

By far, the biggest and most probable risk would be the default of a sizeable global entity that would leave investors scrambling for the high grade names and indeed, the spreads are diverging globally.

Bloomberg HY versus IG spreads

Bloomberg HY versus IG spreads


To continue reading…..