Singapore bonds that typically offer lower yields than US 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 Dollar
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.
