S'pore infrastructure bonds set to gain from global fears

TORONTO • Singapore's first sale of bonds to finance infrastructure projects in over 30 years is ideally timed, as signs of the global recovery stuttering rev up demand for top-rated debt.

The new 30-year securities should appeal to investors due to escalating concerns over Chinese bonds amid property developer China Evergrande Group's debt crisis and fears for global growth given a surge in Covid-19 infections. Yields are also attractive, with those on Singapore's existing 30-year debt climbing above those on US Treasuries last week.

The Monetary Authority of Singapore will announce today how much it intends to raise from the inaugural auction due to take place on Sept 28.

The central bank has already been paving the way for the issue by reducing the size of 15-year and 20-year auctions since announcing plans for the new infrastructure bonds in February.

The new securities are the first to be offered under the central bank's Singapore Government Securities (Infrastructure) category, as distinct from its regular SGS (Market Development) and the Green SGS (Infrastructure) that it aims to kick off next year.

"I expect decent demand," said Ms Irene Cheung, a senior strategist at Australia and New Zealand Banking Group (ANZ) in Singapore. "The sizes of the 15-year and 20-year auctions have been scaled back to provide room, and long-dated yields have edged higher in anticipation of the SGS Infrastructure issue."

One factor set to boost interest in the offering is the crisis at China Evergrande that is fuelling concern about a potential spillover through the region's financial markets. The world's most indebted developer has fallen behind on commitments to suppliers, retail investors and home buyers, raising the spectre of defaults and social unrest in China.

The Chinese government has also spooked traders with a wide-ranging regulatory crackdown in recent months that has pummelled stocks in the mainland and Hong Kong.

"If the property and tech crackdown results in credit events such as defaults, then an abrupt but painful risk repricing could lead to contagion" from China, said Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. If that happens, Singapore's bonds are "in a good place to gain from risk recalibration".

The 30-year sale may also be well received given Singapore is one of just nine sovereign markets with top grades from each of the three major rating agencies. The nation is also the only AAA rated market not to have deeply negative inflation-adjusted yields.

"In the current environment, there is a scarcity of AAA rated government bonds," Mr Eugene Leow, a senior rates strategist at DBS Bank in Singapore, wrote in a note last week. The city's 30-year yield "ranks as one of the highest in the world". "In any case, concerns about lack of demand for duration proved to be unfounded."

The securities also look appealing from another perspective. The yield on the nation's regular 30-year debt has climbed above those on US Treasuries last week for the first time since May last year. The auction size also appears to be relatively modest, with ANZ and DBS estimating the amount raised will be about $2 billion.

The issuance of SGS (Infrastructure) was first announced by the Ministry of Finance on April 5 after Deputy Prime Minister Heng Swee Keat tabled the Significant Infrastructure Government Loan Act (Singa) in Parliament.

The new Bill, which was passed on May 11, allows the Government to borrow up to $90 billion to spend on major national infrastructure projects that will last for at least 50 years. Under Singa, the Government also plans to issue green bonds to fund long-term infrastructure projects that are considered environmentally sustainable, such as the new rail lines.

The SGS (Infrastructure) securities will help spread expenditure on nationally significant infrastructure projects, such as the Cross Island and Jurong Region MRT lines and Deep Tunnel Sewerage System, across the generations who will benefit from them, Mr Heng said in April.

Singapore last borrowed for infrastructure in the 1970s and 1980s, when it was building Changi Airport as well as the first MRT lines. The Government stopped borrowing for infrastructure in the 1990s.

BLOOMBERG