This is part two of our Singapore series accompanying the launch of our United SG Dynamic Income Fund. In this article, we look at the appeal of the Singapore bond sector, but also why investors may want to reduce their holdings if the economy starts to recover next year.

A tough year so far

Singapore and the rest of the world is transitioning from an era of low interest rates to one where rates and inflation are likely to remain high, perhaps for years to come.

This has dampened global growth but contrary to expectations, most economies have so far avoided a recession. The International Monetary Fund (IMF) is expecting the world economy to average about 3.0 percent growth in 2023, slightly down from 3.5 percent in 2022¹, but still in positive territory.

Singapore too has managed to avoid a recession, but only just. This year, global trade, on which the Singapore economy is highly dependent, has been dampened by high borrowing costs, persistent core inflation and geopolitical concerns. As a result, Singapore’s GDP in 2023 is set to reach just 1.0 percent, according to the IMF’s October report.

Strong demand for bond-generated income

Given these economic headwinds, it is not surprising that many investors are flocking to Singapore government and corporate bonds. Singapore bond yields are at a multi-decade high, with Singapore 10-year bond yields currently at around 3.2 percent, a level not seen since September 2008.

Figure 1: Singapore bond yields, Oct 2018 – Oct 2023

Source: S&P. Based on yield to maturity of the S&P Singapore Bond Index, as of 31 Oct 2023

This means Singapore bonds are offering investors the opportunity to counter inflation, which is projected to be around 4.0 percent for 2023 as a whole. Higher inflation is eroding Singaporeans’ standard of living, with real median incomes assessed to have fallen by 4.5 percent in the first half of 2023, compared to the same time last year. So the demand for bonds as an additional source of income is set to stay strong.

Bond prices are well supported

At the same time, the technical backdrop for Singapore bonds is supportive given that current demand is expected to exceed supply. With the issuance of 30-year Singapore Government Securities (SGS) in September, the Singapore bond auction calendar has now closed.

Meanwhile, Singapore corporate bond issuances have been relatively muted since the start of the year. New issues continued to slow in October, with only S$1.2 billion new corporate bonds entering the market, compared to S$1.9 billion in September. This restricted supply, plus halt in policy rate rises, provides further upside potential for Singapore bond prices.

Resilience in a sea of volatility

Another reason for the strong demand for Singapore bonds is its quality. Singapore government bonds’ highest possible triple-A sovereign credit rating has allowed prices to be significantly less volatile than global government bonds. Since the US Fed started its rate hiking cycle in March 2022, Singapore government bonds have declined by 3.74 percent, compared to the 15.97 percent fall for global government bonds.²

Figure 2: Singapore vs World government bonds, March 2022 – Oct 2023

Source: Bloomberg, as of 31 Oct, Singapore government bonds (FTSE Singapore Govt Bond Index), World government bonds (FTSE World Govt Bond Index)

Similarly, Singapore’s local-currency corporate bonds are issued largely by statutory boards, financial institutions, and blue-chip companies. These entities tend to have strong credit fundamentals and lower default risk, making Singapore corporate bonds a relatively stable asset class.

Figure 3: Top 10 issuers of Singapore corporate bonds in 2022

Source: AsianBondsOnline, as of 31 December 2022

Bonds have returns limitations

Ultimately, it is useful to think of bonds and equities as playing different roles in an investor’s portfolio. Bonds help to generate income and reduce overall portfolio risk. For example, the 5-year volatility for Singapore bonds stands at just 4 percent, compared to 14 percent for Singapore equities³.

Meanwhile, equities help to boost portfolio returns over the long term. As shown in Figure 4 below, in good years, Singapore equity returns far exceed that of bonds. As a result, looking back over the past 10 years, Singapore equities have returned 3.4 percent per annum, double that of a bond-only portfolio⁴.

Figure 4: Total returns of Singapore bonds and Singapore equities (%), 2013 - 2022

Source: Respective index providers (Singapore bonds: S&P Singapore Bond Index, Singapore equities: FTSE Straits Times Index), as of 31 October 2023

In addition, Singapore bonds tend to be negatively correlated to Singapore equities, that is, when one goes up, the other goes down. In seven out of the past ten years, Singapore bonds moved in the opposite direction to Singapore equities.

Why dynamic asset allocation?

With a new year fast approaching, UOBAM expects Singapore’s economic growth to gradually improve, although this may not be evident till the second half of 2024. This will likely be driven by US interest rate cuts next year, but also good recovery in Singapore's services and travel-related industries.

Given this, we would expect the Singapore stock market to show an uplift next year, and for investors to diversify away from lower-risk asset classes into higher-risk asset classes. However, it is hard to strike the right balance between the two, especially when markets and macro-economic conditions are fast-moving.

A dynamic asset allocation strategy involves making regular and active adjustments to asset class weights to take advantage of opportunities as they arise. This means taking a more defensive positioning in Singapore bonds when near-term uncertainties increase, and resuming a growth stance in Singapore equities when uncertainties subside.