Singapore Depreciation Spurs Yield Premium to U.S.: Asean CreditLilian Karunungan
Singapore bonds that typically offer lower yields than U.S. Treasuries now pay the highest premium since 1998, as analysts cut forecasts for the city’s dollar.
The spread, which turned positive in September, reached 33 basis points on Feb. 24, after the Monetary Authority of Singapore followed global central banks in easing policy on Jan. 28. Singapore’s dollar will weaken 2.4 percent to S$1.39 versus the greenback by end-2015, according to the median estimate in a Bloomberg survey that has fallen for five months.
The AAA-rated debt is losing its appeal as investors scale back estimates for currency gains that previously allowed them to accept low yields. The MAS, which uses the exchange rate as its main policy tool, reduced the pace of the local dollar’s appreciation against its trade partners after the economy grew the least in five years in 2014 amid restructuring that includes reducing reliance on cheap foreign labor.
“The market is questioning whether the MAS can maintain the steep Singapore dollar appreciation that we have seen in the past,” Luc Froehlich, who helps oversee $45 billion of Asian debt as a portfolio manager at Manulife Asset Management Ltd. in Singapore, said by phone on Feb. 25. “If you look at the economic restructuring, from a labor-intensive economy toward one driven by higher efficiency and innovation, the expected productivity gains are yet to be seen.”
Singapore’s dollar has gained 25 percent in trade weighted-terms in the last 10 years, according to a monthly index compiled by the Bank of International Settlements. The gauge fell 0.5 percent in January.
The currency has lost 8 percent against the greenback in the past six months, the third-worst performance among major Southeast Asian economies, and advanced against the euro, yen and Malaysia’s ringgit. It rose 0.1 percent to S$1.357 as of 1:30 p.m. in Singapore Friday.
The extra yield offered by the city state’s 10-year sovereign bonds reached a record 97 basis points in October 1998 and was at 21 on Friday, data compiled by Bloomberg show. In the past decade, the yield has averaged 79 basis points lower than comparable Treasuries.
The sell off in local notes will end as Singapore’s trade-dependent economy benefits from an improved outlook for global growth, according to Tim Condon, head of Asia research at ING Groep NV in Singapore. He predicts the 10-year yield, which has risen 42 basis points from its January low to 2.22 percent on Friday, will end the year at 2.3 percent.
“The outlook is more positive at the end of the year than it is at the beginning,” Condon said by phone on Feb. 24.
The MAS guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the its slope, width and center.
Policy makers will probably widen the band at the next review due in April to allow more flexibility in managing the exchange rate, according to Manulife Asset and the Commonwealth Bank of Australia.
The central bank is probably intervening by selling U.S. dollars to maintain its currency within the policy band, according to Andy Ji, a Singapore-based strategist at Commonwealth who previously worked as an economist at the MAS. The nation’s foreign reserves fell for a seventh month in January to $251 billion, the lowest since August 2012, central bank data show.
“Right now you have an exchange rate trading at the bottom of the range,” Ji said by phone on Feb. 24. The surprise inter-meeting easing in January “was a very bad move for the MAS. They just have their back against the wall,” he said.
The outlook for monetary policy remains “appropriate” and unchanged, Jacqueline Loh, deputy managing director at the central bank, told reporters on Feb. 17.
The authority estimates economic growth of 2 percent to 4 percent this year compared with 2.9 percent in 2014. Last month it cut its 2015 inflation forecast, predicting prices may fall as much as 0.5 percent. Consumer prices fell for a third month in January, which justifies the recent easing by the MAS, Bank of America Merrill Lynch said in a Feb. 23 research note.
Singapore sold 30-year bonds on Feb. 25 at 2.86 percent compared with 2.76 percent at the last such offering in February 2013, central bank data show. The notes offered a 19 basis-point premium to comparable U.S. debt on Friday.
The Bloomberg Dollar Spot Index, which track’s the greenback’s performance against 10 major peers, has advanced 15 percent in a year amid the prospect the Federal Reserve will raise interest rates as the world’s largest economy recovers.
“As long as the U.S. dollar strengthening continues, Singapore treasuries will either trade at par or at premium,” Aaron Low, the Singapore-based principal at Lumen Advisors LLC, a hedge fund, said in a Feb. 25 e-mail. “When the market sells off bonds, it tends to pick the weakest currency to sell. In this case, Singapore dollar’s devaluation fits the bill.”
(An earlier version of this story was corrected.)