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Singapore Bonds Lag Behind in Southeast Asia Amid Global Central Bank Easing Talks

Singapore's bonds lag in Southeast Asia with over 4% loss, facing challenges from persistent inflation and global rate dynamics.

By Barry Stearns

4/3, 21:34 EDT

Key Takeaway

  • Singapore government bonds are the weakest in Southeast Asia, losing over 4% in dollar terms amid persistent inflation and solid economic data.
  • Local yields may not benefit significantly from anticipated Federal Reserve rate cuts due to close ties with US market dynamics.
  • Persistent inflation across emerging Asia poses risks to bond prices, with regional central banks maintaining a hawkish stance.

Singapore Bonds Underperform

Singapore government bonds have emerged as the weakest performers in Southeast Asia, with a loss exceeding 4% in dollar terms this year, according to Bloomberg data. This trend is set against a backdrop of persistent inflation and solid economic data within the country. The Monetary Authority of Singapore (MAS), which primarily uses the local currency as its policy instrument, is expected to maintain its stance in the upcoming policy review. This situation leaves Singapore bonds heavily influenced by international market dynamics, particularly those in the United States.

Global Central Bank Easing Anticipated

Investors worldwide are closely monitoring central banks, especially the Federal Reserve, for signs of easing monetary policies following a significant tightening phase. However, expectations for the commencement of rate cuts have been delayed due to the resilience of the US economy and a rebound in Treasury yields to yearly highs. Singapore bonds, closely tied to the US market, find themselves in a precarious position. Local yields are likely to mirror increases in US Treasury rates but may not benefit as significantly from rate cuts when they begin. Eugene Leow, a senior rates strategist at DBS Group Holdings, suggests that Singapore dollar (SGD) rates might decrease less than US dollar (USD) rates in an easing cycle, anticipating between two to three Federal Reserve cuts this year.

Inflation and Monetary Policy in Focus

Singapore's core inflation rate, excluding housing and private transportation costs, reached a seven-month peak in February, underscoring the MAS's challenge in adjusting policy settings. The MAS is not expected to alter its policy until October, barring significant declines in inflation in the upcoming months. The US economic outlook and the strength of the USD are deemed more critical to Singapore bond yields than domestic issues, with MAS likely to maintain its current policy in April. This stance is supported by comments from Federal Reserve officials, including San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester, who anticipate three rate cuts in 2024 but emphasize the need for more evidence of declining inflation before action is taken.

Emerging Asia Bonds at Risk

The broader emerging Asian bond market faces challenges due to persistent inflation, which could delay interest rate cuts across the region. Recent data showed that Malaysia and Singapore's headline inflation rates exceeded estimates, a trend observed across all emerging Asian economies. The Taiwan central bank's unexpected rate hike last week highlights the regional commitment to combating inflation, even at the risk of delaying economic stimulation through rate cuts. This hawkish stance by central banks, aimed at controlling inflation, could negatively impact bond prices in emerging Asia, posing risks to investors.

Street Views

  • Eugene Leow, DBS Group Holdings (Neutral on Singapore government bonds):

    "Given that USD rates have run up a lot more than SGD rates, we would expect SGD rates to fall less than USD rates in an easing cycle. A reasonable base case is between 2-3 Fed cuts this year. So SGD rates should already be reflecting this pricing."

  • Winson Phoon, Maybank Securities Pte (Neutral on MAS policy and its impact on Singapore bonds):

    "MAS policy isn’t likely to change until October unless Singapore inflation posts larger than expected declines in the coming months."