Long-End HDB to Benefit from Flatter SOR, Price Discovery

14 April 2016

Credit and RV Idea

           

Long-End HDB to Benefit from Flatter SOR, Price Discovery  

Highlights/Updates:

·         HDB set to issue SGD600m of 5y bond, which should offer investors more choice from the existing SGD20bn outstanding from the quasi-govvie and highly-rated issuer space of SGD market. To recap, HDB’s most recent issuance was in January of SGD1bn, 7y at 2.50%. The issuer has about SGD1.8bn to mature from now until end-2016; hence, we expect technical support to remain from refinancing needs. 

·         The issuer benefited from Moody’s rating initiation of Aaa for HDB in Oct-2015. The highest rating mirrors the Singapore Government as shareholder via the purview of the Ministry of National Development and its strategic importance as a policy arm of the Government in implementing housing and social policies. HDBSP’s spread over Singapore Government Securities (SGS) has narrowed to c.30-50bps (from 60-80bps previously) as a result of Moody’s rating action.

·         Closely correlated with SOR benchmark given the liquidity and low-risk nature. The benchmark SOR, which correlates closely with the USDSGD currency pairing, has eased off after the FOMC meeting in March; the market generally expects a zero to one rate hike in 2016, compared to four at the beginning of this year, given sluggish global growth. Due to their good liquidity and low credit risk, HDBSP papers tend to track the SOR trajectory better than other SGD corporate names, and would stand to benefit from low global interest rates and yields.  

Bond Details:

Bond	Housing Development Board, HDBSP 3.10% 7/24 (Price: 106.7 ; YTM: 2.21% : SOR+6bps)
Amount Outstanding	SGD900m
ISIN	SG6SB9000006
Ratings	Aaa/NR/NR

Relative Value Commentary:

We prefer the longer-dated HDBSP from the complex, particularly HDBSP 7/24 which appears more liquid relative to other longer-dated issuances. As per Figure 2, the HDBSP RV curve has bull flattened if compared to 6 months ago, led by declines in longer-dated issuances. This mirrors a similar movement in the benchmark swap curve (as per Figure 3), where the 2y/10y spread has narrowed to around 75-85bps, mostly led by rises in the short-term SOR.

We opine that short-term rates will continue to be sensitive to global macroeconomic expectations (such as the trajectory of future US rate hikes) in the next 6-9 months and as such, would expect a flatter yield curve as short-dated yields rise at a faster pace.