Increasing levels of bonds issued from small- and medium-sized companies supported by leveraged investor demand could pose a big risk to Singapore bond markets.
Tan said: ‘The issuance of small and enterprise bonds whose investor demand is fuelled by leverage provided by banks for these bonds could pose a threat to the Singapore bond market outlook.’
‘In addition to the credit concerns over some of these bonds, the situation could unravel when interest rates start to rise.’
Tan said the overall issuance of high quality paper had slowed in Singapore since 2012, a record year for Singapore bond issuance. ‘As a result of the shortage in supply, demand for Singapore bonds is strong,’ he added.
In terms of investment strategy, Tan said his fund is currently tactically long duration relative to the benchmark, as well as being overweight corporate bonds.
‘We expect Singapore bonds to put in a good performance until the year end and thus it is an attractive proposition to be tactically long in duration relative to benchmark at the moment,’ he said.
Taper caper fallout
Tan said recent bond performance had ‘surprised investors’ since former Fed chair Ben Bernanke first mentioned tapering of the central bank’s asset-buying programme early last year.
There had been a widespread expectation bonds would pull back and rates would rise, especially as the US economy kept improving. However, a year on, the economic environment hasn’t improved enough to justify a rate hike, Tan said.
‘In view of the less than even US economic recovery, we do not expect US interest rates to rise any time soon. Singapore’s interest rate, which has always tracked that of the US, is also not likely to rise as a result,’ he said.
‘If US economic growth starts to gain momentum, we may reverse our long duration position,' he added.
In the three years to the end of June 30, the Eastspring IUT Singapore Select Bond Fund returned 6.55%, while the Citywire benchmark, the Markit iBoxx ABF Singapore TR index, rose 3.54%.