Keynote address by <b>Mrs Linda Koh</b>, Senior Director, Markets & Investments Department, at the seminar on "Developments & Opportunities in the Singapore Bond Market"Organised by ACI Singapore - The Financial Markets Association
Date: 22 Jan 1999
1.1 Good morning ladies and gentlemen. It is an honour to be invited to deliver this keynote address on "Developments & Opportunities in the Singapore Bond market", organised by the ACI Singapore - The Financial Markets Association. If you would lend me your ears for the next few minutes, I shall take you through the exciting developments that have shaped the Singapore bond market in recent months. There are opportunities for everyone. The relatively low interest rates currently have made the issue of bonds an attractive proposition for borrowers, to lock in their cost of funds for the long term. In this disinflationary environment, bonds of creditworthy borrowers offer a relatively safe and attractive real rate of return for investors. For financial intermediaries, there are abundant opportunities to provide your expertise to the borrowers, in bringing these new bond issues to the market, placing these issues with investors, honing your trading skills and providing liquidity to the secondary market.
2 Development Objectives & Opportunities
2.1 As many of you are aware, our aim is to establish Singapore as the hub for issuing, arranging and trading bonds and other fixed income securities. This set of activities will further complement and enhance Singapore's existing range of Treasury activities, ACU operations and other financial services provided. Despite the turbulence in financial markets in recent months, which has severely affected the economic climate and investors' appetite for risk in the region, the debt capital market stands out as an important area, which Asia needs to develop to tap funds, to finance her financial sector recapitalisation and infrastructural development.
2.2 The economies in the region are facing difficult times but some farsighted banks, which can envision the potential of this market in times of crisis, have already mapped out their strategies and positioned themselves, to seize the opportunities when the region recovers. On our part, MAS has put in place measures that have changed the landscape of Singapore's bond market. We are continually reviewing market developments to make further improvements.
3 Key Elements for a Successful Debt Hub
3.1 The foundation and ingredients necessary for a deep and broad bond market have been identified as:
Firstly, a deep and liquid Singapore Government Securities market with a yield curve responsive to demand and supply conditions;
- Secondly, a conducive environment for domestic and global bond issuers;
- Thirdly, a diverse investor base; and
- Fourthly, a strong talent pool with expertise and experience in debt origination, trading and sales.
Let me take you through these 4 key elements.
4 Singapore Government Securities Market
4.1 The task at hand is to seed a vibrant and liquid Singapore Government bond market. To do this, we have stepped up the issuance of SGS to develop a yield curve, to serve as a benchmark for pricing S$ bond issues and hedging risk exposures. In the past, the SGS issued have been held mostly by financial institutions for their minimum liquid asset requirements. The Singapore Government also does not need to issue SGS to finance a budget deficit, and has been issuing them largely to meet this captive demand. Supply was not excessive so that there was very little trading in the secondary market. Notwithstanding, the gross issuance of SGS had grown by 13% annually over the past 10 years. In 1998 alone, SGS issuance increased by 28%. The net issuance last year was S$1.6 billion in Treasury bills and S$4.9 billion in Government bonds, bringing the total outstanding Treasury bills and bonds in the market to S$8.5 billion and S$20 billion respectively. But, last year's issuance was exceptional. About S$5 billion of funds were returned to banks and finance companies, after their minimum cash balances with MAS, were reduced by 3% of their liabilities base. Some of these funds were invested in SGS when loans growth slowed.
4.2 We have also extended the SGS yield curve to 10 years. The first 10-year Government bond issue was successfully auctioned in Jul last year. The average yield of this first 10-year bond was 5.67% pa. Interest rates have since fallen, and investors of this bond are enjoying capital gains, with the price appreciating to 107.80. Even the latest 10-year bond issued in Jan this year offers an attractive yield of 4.42% pa currently, compared to a negative inflation rate of -1.5% pa, and an average 12-month bank deposit rate of around 2.50% pa. Of course, bond investments carry a risk of capital loss, if interest rates should rise. There is also the risk of loss of the principal sum invested, if the bond issuer should default. Singapore has a triple A credit-rating though, the highest credit-rating obtainable.
4.3 To assist dealers, investors and other market participants, we announced in Jul last year, a calendar of regular SGS issuance. There is an SGS issue every month. We continue to have weekly issues of 91-day Treasury bills; 3 issues of 2- and 5-year bonds; and 2 issues of 1-year Treasury bills, and 7 and 10-year bonds annually. Due to the demand for SGS as minimum liquid assets, the date of issuance will usually coincide with the maturity dates of existing issues. The size of the issue will be announced 2 or 3 weeks before the issuance date, based on prevailing market conditions. We are constantly reviewing conditions in the SGS market and will respond to changes in market demand. With these measures, we have seen an improvement in trading volume in the SGS market. Compared to a daily average of S$530 million in 1997, trading activities have picked up and risen to a daily average of S$870 million in 1998, and over S$1 billion daily, for four months last year.
4.4 With the increased issuance and higher turnover in the SGS market, the SGS yield curve is now more responsive to demand in the market. The yields of the Singapore Government bonds have been used as a guide to price the recent S$ bond issues by the International Finance Corporation or IFC and the Jurong Town Corporation. These issues are currently trading about 40 to 50 basis points above the SGS yields.
4.5 Primary dealers are important in the SGS market, as they are committed to providing liquidity in the secondary market. They quote 2-way prices under all market conditions. Their bid-offer spreads can be as fine as 5 cents, for a standard trading lot of S$3 million. Although the number of primary dealers had remained at 8 over the years, the number of secondary dealers with SGS customer accounts with MAS, has grown to 20. There are another 52 banks with their own SGS accounts with MAS. The 8 primary dealers are by no means a fixed number. As the SGS market expands, there will be increased scope and demand for more primary dealers. In fact, we have approved a new primary dealer in December last year and are reviewing another application. Two money broking houses have also started providing broking services for SGS in the interbank market, since Nov last year. Their role in enhancing the price transparency of SGS trading, should encourage more active participation in the SGS market. Their prices and those of the 8 primary dealers and MAS, are posted and updated regularly on the screens of widely available newswire services.
4.6 But more needs to be done to improve liquidity in the SGS market, particularly the repurchase agreement or repo market. An efficient repo market will allow market players who wish to hold short positions in the SGS market to cover their positions. To this end, we have allowed banks to extend freely S$ credit facilities to non-bank non-residents, for SGS repo, with full delivery of collateral, where the amount does not exceed S$20 million, and the funds are managed in Singapore. The activity in the SGS repo market was S$280 million daily in 1998 and should be increasing with more SGS issuance and participants in the market, holding a diversity of views. The MAS will also continue to use SGS repos in our money market operations.
5 Conducive Environment for Private Sector Bond Issues
5.1 Moving on to S$ private sector bond issues. Various tax incentives covering interest, trading and fee income from arranging, underwriting and distribution activities, have been introduced to encourage these activities in the debt capital market. The new MAS Notice 757 on S$ internationalisation, allows foreign entities with good standing to issue S$ bonds, for use outside Singapore, provided that the S$ proceeds are swapped into foreign currency in Singapore. In addition, the swap counterparty of approved bond issuers are exempted from providing minimum cash balance and liquid asset requirements for the S$ funds received via the currency swap. The reserve requirement exemption, lowers the borrowing cost of bond issuers and makes issuing bonds in Singapore an attractive alternative. Since the introduction of these measures, MAS has received several applications by supranationals, financial institutions and companies to issue bonds in S$ in Singapore. The first supranational bond issue by the IFC was very well received. In November last year, Jurong Town Corporation, the first of other statutory boards who will be tapping the bond market, issued S$300 million 7-year bonds. The S$10 million retail portion of JTC's debut bond issue, was snapped up in 1? hours. JTC auctioned a second issue of S$300 million 10-year bonds yesterday with a larger amount of S$20 million of the issue offered to retail investors. Other statutory boards, such as the Housing Development Board and the Land Transport Authority will be following JTC and source their funds for infrastructure projects in Singapore, from the S$ debt market, on a regular basis.
5.2 With the increased exchange and interest rate volatilities arising from the regional currency crisis and higher non-resident bond issuance, there is now, more customer demand to hedge their long-term currency and interest rate risks and there is a noticeable pick-up in activity in the interest rate and cross currency swap markets. Whilst banks in Singapore are still required to consult MAS for S$ swaps with banks outside Singapore, they can transact S$ currency swaps freely among themselves. The liquidity that they provide in the long-term swap market is improving. The swap spreads of about 30 basis points currently can be expected to narrow with increased activity. As the SGS market grows deeper and more liquid, traders will be able to price more confidently, their interest rate and currency swaps, off the SGS yield curve, if they can lay off their risks in this market. There are also more participants engaging in arbitrage and yield curve plays, to take advantage of anomalies in a more liquid SGS market.
5.3 International investors who lend uncollateralised in the bond market require a minimum standard of credit-worthiness of the issuers, as indicated by their credit-rating. The major international credit rating agencies, assisting in this role, have established their presence in Singapore since 1996, to provide easier access for the better companies in Singapore and the region, to seek credit ratings and tap the bond market.
5.4 Generally, corporate bonds offer investors a higher rate of return than sovereign bonds, commensurate with their higher credit risks. In Singapore, the issue of shares has long been the preferred mechanism for companies to raise funds to finance their expansion plans. Having learnt from the currency crisis not to depend solely on short-term borrowings to finance long-term investments, companies are turning to the debt market, to lock in a fixed cost of funding and insulate themselves from uncertainty and interest rate volatility. A broad cross-section of issues of different credit qualities and rates of return will appeal to investors of varying risk/return preferences and trading behaviour. From virtually riskless Singapore Government Securities and statutory board issues to investment grade corporate bonds, there will be a wider choice now for investors.
6 Diverse Investor Base
6.1 Aside from a conducive environment for domestic and global bond issuers, we would also need to have a diverse investor base with varying risk appetites for these bonds. This ties in with the Government's plans for the fund management industry. As announced previously, GIC and MAS' plans to place out S$35 billion for private management over the next three years, would further increase the number of fund management companies in Singapore, and broaden the investor base. To augment the demand for debt securities, the CPF Investment Scheme has been liberalised to allow members to invest part of their CPF savings in professionally managed funds, including fixed income bond funds. CPF members can also invest their CPF savings directly themselves, in Singapore dollar statutory board bond issues. The success of Jurong Town Corporation's bond issues testifies to investors' appetite for S$ bonds.
6.2 In the SGS market, there are signs that the investor base is growing in diversity. Unlike the past, where SGS auctions were dominated by banks, we are seeing more active participation by non-bank financial institutions, corporate treasuries, fund managers, insurance companies and individual investors at the SGS auctions. We are also receiving more enquiries on the SGS market.
6.3 United Overseas Bank has launched today a UOB SGS index to provide fund managers, treasurers and other market participants in the Singapore bond market with a benchmark to evaluate the performance of a S$ fixed income portfolio and the performance of the SGS market against other government markets.
7 Talent Pool
7.1 We have a more active SGS market. We have the issuers, we have the investors, and we have an environment to nurture bond market activities. What we need are more intermediaries - financial institutions which can provide expert advice to the borrowers and launch their bond issues successfully; professionals who can promote and sell these products to investors, trade them and create new strategies for their customers. With the global trend towards disintermediation and securitisation of assets, there are rewarding opportunities for financial innovation in the bond market. We hope Singapore would be home to professionals with the expertise and experience to bring the Singapore bond market to a higher level of sophistication.
8.1 May I conclude by saying that, the necessary foundation for developing the Singapore bond market has been laid. It is now up to the market participants. The challenge before you - issuers, investors and financial intermediaries - is to create and seize the opportunities ahead to benefit you. Thank you.