Singapore Market Review

Singapore bond markets closed the year on a strong note and turned in positive performance for December. The UOB Singapore Government Bond All Index gained 1.33 percent for the month. Singapore government bonds benefited from a worsening in the global recession and a subsequent rally in global bonds, and yields reached new lows for the year. As economic data continued to weaken, officials acknowledged the worsening domestic economic outlook. This acknowledgment supported investors’ bias for the relative safety of bonds. However, as the market adjusted for new supply and some profit taking, some of the gains were pared back. Although the market remained flushed with liquidity as overnight interbank rates eased by an additional 12.5 basis points (bps), investors’ desire for higher yields amid falling inflation promoted a further flattening of the yield curve. The 2/10 year Singapore Government Securities (SGS) yield curve compressed by a further 20 bps in December, while 2-, 5- , 10- and 20-year SGS benchmark yields were lower by 2, 15, 28 and 33 bps respectively.

In the corporate bond world, the market remained dysfunctional; this was further compounded by the typical year-end illiquidity. Swap spreads narrowed, aided by excess interbank liquidity, and general risk aversion kept most trading books closed. As a result, most trades were due to redemption pressures, and were done on a matched-trade basis between end customers with prices marked down. Credit spreads subsequently inched wider yet again amid fears of earnings revisions ahead. In contrast, swap spreads were lower across the maturity spectrum with 2-, 5- and 10-year swap spreads at a respective 14, 20 and 2 bps for the month. Corporate bonds continued to underperform both swaps and government bonds on a total return basis. The HSBC Singapore Local Currency Non-Government Sub Index posted gains of only 0.95 percent and trailed SGS by 38 bps.

Economic data reported during December was weak across the board and continued to point toward a deepening and protracted growth slump for the domestic economy. Industrial production contracted a further 7.5 percent in November while non-oil domestic exports fell by another 17.5 percent for the same month in their seventh consecutive monthly decline. Real retail sales contracted 8.5 percent in October, the worst contraction since May 2002, and PMI for December was at 44.8 in its fourth back-to-back monthly reading below the neutral level of 50. Inflation also fell to 5.5 percent in November from 6.4 percent the previous month.