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Focus on investment grade the key in bonds: DBS banker


IT'S been a rough first quarter for bond markets, but focusing on investment grade and familiar names has gotten DBS Bank over the line, said a relieved Clifford Lee who heads the bank's fixed income business.

Among the many deals DBS has done so far, they include the mega transactions of S$1.5 billion for the Land Transport Authority of Singapore and S$1.5 billion for HDB.

"We have been focusing on getting the bigger issues out of the door," said Mr Lee in a recent interview.

Issuance for the quarter is up 12 per cent to S$6 billion from 25 issues and DBS has further cemented its dominance with a 41 per cent market share, up from 31 per cent the same period in 2017.

Mr Lee noted that other than a good first two weeks in January when markets were still buoyant, carrying over the momentum of the latter part of 2017, the rest of the quarter has been volatile from interest rate concerns as seen from the rise of the US 10-year Treasury from 2.4 per cent to almost 3 per cent.

Adding to interest rate volatility are trade tensions between the US and China, he said.

"Q1 was extremely choppy," he said.

The bulk of the 25 issues has been from government entities like LTA or Temasek-linked companies such as SMRT and Mapletree Commercial Trust. The rest were familiar credits like ARA Asset Management or GuocoLand.

"We're glad to get across the line and help our clients who wanted to tap the market," he said.

Performance of the new issues has been okay, with most trading around par or just marginally under. This shows the caution of investors who are taking a wait-and-see attitude, he said.

"Sentiment is cautious and showing up in the thin secondary market liquidity - not seeing panic (selling), neither are they charging into new issues."

The poor liquidity comes from a stalemate in the market at the moment, it seems.

Fund managers say the pressure to deploy funds is not there because while investors are not redeeming or exiting funds, they are also not increasing their investments, he said.

Still the market remains open, Mr Lee insists, though to get investors interested, issuers might have to pay a premium.

He estimates that a 10 basis points premium might do it for repeat issuers or investment grade names.

For instance a 7-year deal might now require 80 basis points spread, up from 70 basis points before. Bonds are priced off interbank interest rates.

"Investors need to be a little more defensive, and ask for a little premium to cushion potential mark- to-market swings," said Mr Lee.

As for first-time issuers, he reckons it could happen if the investors are already identified, which means a good chunk of the deal is anchored or has found buyers.

The market may be thin but that has not stopped more banks from getting into the business, so fees are under pressure.

Also, fees from investment grade issuers like government-linked entities are unlikely to be rich, he acknowledged.

Pointing to the slowdown in the bigger Asia excluding Japan G3 - USD, yen and euro - market, he said there are more players in those deals despite lower volumes.

Year-to-date Asia ex-Japan G3 issuance is down 10 per cent to US$75 billion. Shenzhen-listed Tahoe Group Global's US$430 million transaction in January involved 26 banks including DBS.

"Especially for deals out of Greater China, everyone's sharing with more banks."