In a world of negative yields, Singapore government bonds still pay interest

Singapore's July 2029 debt that's been sold in the past yielded 1.83 per cent in the secondary market on Aug 22. That compares with 1.64 per cent for 10-year US Treasury notes.
Singapore's July 2029 debt that's been sold in the past yielded 1.83 per cent in the secondary market on Aug 22. That compares with 1.64 per cent for 10-year US Treasury notes.ST PHOTO: KELVIN CHNG

TOKYO • Singapore is offering a rare opportunity to buy positive-yielding quality bonds in a world that is rapidly turning negative.

The city state, which pays the highest returns among economies that have AAA credit ratings from all three major agencies, will sell reopened July 2029 government debt worth US$2.9 billion (S$4 billion) on Wednesday, the second-largest amount on record for 10-year tenors.

Investors fleeing risk on escalating trade wars and fears of a global recession have jumped into the safety of bonds, driving up their prices and pushing down their yields, given that bonds have fixed coupon rates or interest payments.

Yields are also cascading lower as global central banks rush to cut interest rates, a factor feeding the downward spiral in yields.

The result is that in the last few months, the global mountain of negative-yielding sovereign bonds has swelled to almost US$17 trillion - or 30 per cent of the global, tradeable bond universe.

Investors now hope for price appreciation on instruments where they had once looked for yield.

Germany, Denmark, the Netherlands and Finland now have all their bonds across the spectrum - one year to 10 years and beyond - trading with negative yields. Sweden, France and Japan are not far off being totally negative too.

The yield on the benchmark United States 10-year Treasury bond remains in positive territory - but only just, and it is trekking down.

Government bonds are not the only investments producing negative returns.

Negative-yielding corporate debt also recently passed US$1 trillion in market value, CNBC reported last week.

Singapore is not immune to the underlying trends in global bonds and the sale of its 10-year bond has to overcome the challenge of a yield curve that is near the flattest on record.

The yield premium that investors receive by holding US 10-year notes instead of two-year securities briefly evaporated this month, dropping to minus 1.14 basis points on Aug 15.

That is the lowest in data going back to 1998 for this spread, which managed to claw its way back into positive territory.

Size also matters, as Germany discovered last week, when it failed to meet a €2 billion (S$3.1 billion) target last week for the world's first 30-year debt with a zero per cent coupon.

But if Australia is any guide, the Singapore auction should see solid demand, given the combination of the country's top rating and high yields.

A flatter curve has not dented investor appetite in AAA-rated Australia, which recently drew a bid-to-cover ratio of 3.69 for May 2030 notes.

That was up from 2.67 at the previous offering, even as the spread between three-and 10-year yields narrowed to the least since 2011.

Singapore's July 2029 debt that has been sold in the past yielded 1.83 per cent in the secondary market last Thursday.

That compares with 1.64 per cent for 10-year US Treasury notes.

This is the last sale of 10-year notes on Singapore's schedule to date, with the remaining two auctions on the calendar for two-and seven-year debt.

An optional "mini" auction has been planned next month but the tenors have not been announced.

"A lot of investors will be trying to 'catch the tail'," said Mr Eugene Leow, a fixed-income strategist at DBS Bank in Singapore, referring to the chase for the highest yields possible.

"Within the AAA space, I believe 10-year Singapore government securities offer one of the most attractive yields."

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A version of this article appeared in the print edition of The Straits Times on August 26, 2019, with the headline 'In a world of negative yields, S'pore govt bonds still pay interest'. Print Edition | Subscribe