Negative bond yield arrives in Singapore with UOB's 1b-euro issue


UOB has sold the first negative-yielding bond out of Singapore, and market watchers say it won't be the last from the Singapore banks.

The bank priced one billion euros (S$1.6 billion) of seven-year covered bonds at 0.01 per cent. The reoffer spread of 17 basis points above the mid-swap - a reference point - equates to a reoffer yield of -0.21 per cent.

A negative bond yield is when an investor receives less money at the bond's maturity than the original purchase price. Covered bonds are debt issued by banks, secured by a pool of assets, typically mortgages.

In this case, the new bonds will be issued above par, at 101.553 per cent, on Dec 1, 2020 and mature on Dec 1, 2027. They will be guaranteed by Glacier Eighty. This guarantee is secured by a portfolio of loans purchased by Glacier Eighty from UOB, as well as other assets of Glacier Eighty.

Timothy Ang, bond analyst at Phillip Research Securities, told BT that the negative yielding bond allows UOB to reduce its borrowing costs and thinks that more banks might follow suit.

Likewise, Jeffrey Halley, senior market analyst of Asia-Pacific at Oanda, said the success of UOB's issue will pique the interest of other local banks. While he noted that each bank's loan book and funding profile is different, he said the issue shows the "power of Singapore's banks to raise cheap funding thanks to their immensely strong balance sheets and that of the sovereign". "I could easily expect more of this type of issue to appear from Singapore's banks, especially if lending increases as the economy recovers in 2021."

Peter Oh, founder of finance commentary website The InvestQuest, pointed out that DBS and OCBC have previously issued covered bonds via their respective global US$10 billion covered bond programmes, though none have been negative yielding.

"Market consensus is that yields will start to rise alongside an economic recovery from the global pandemic. If DBS and OCBC agree with this, they could take this opportunity to raise capital cheaply before yields rebound," Mr Oh said.

DBS and OCBC did not respond to press queries directly on whether they would issue such bonds.

There are other firsts cracked by UOB with this deal. The transaction size of its latest offering is the largest for euro-denominated covered bonds from Singapore, the bank said.

The pricing also makes the issuance the deepest negative-yielding covered bonds on record in Asia-Pacific (Apac), and the tightest seven-year covered bond issuance spread in Apac since October 2018, UOB said.

The final orderbook stood in excess of 2.1 billion euros from 85 investors, with the deal about two times subscribed.

Wee Ee Cheong, UOB deputy chairman and CEO, said: "The strong reception to our latest euro covered bond shows global investors' confidence in Singapore's sovereign strength and robust operating environment, as well as UOB's strong business fundamentals. Having been the first Singapore bank to launch euro covered bonds, we are pleased to have brought it back to investors for their portfolio diversification. This way, we also contribute to the deepening of Singapore's capital markets."

UOB said the pricing was revised from a guidance of 22 basis points above mid-swap to 17 basis points above mid-swap, "with minimal drops in the orderbook". "The final pricing achieved was inside fair value," UOB added.

With the new funding, the bank hit cost savings of 27 basis points, when compared with seven-year US dollar senior funding on a three-month US dollar London interbank offered rate basis.

The euro covered-bond market has also allowed UOB to lengthen its debt's tenor in a cost-efficient manner, as other covered-bond markets, such as those denominated in the US dollar, tend to favour shorter tenors, UOB added.

Oanda's Mr Halley said: "I suspect most of the buyers were probably European pension funds which have to maintain certain proportions of bonds and at certain credit ratings in their portfolios."

The InvestQuest's Mr Oh said investors who subscribed to this issue could include USD-based investors who plan to use the FX forward markets to derive a positive USD-equivalent yield. Investors might enjoy a yield pick-up over equivalent AAA-rated euro-denominated bonds too, he added.

Just last week, China's first negative-yielding sovereign bond drew bumper demand from European debt investors facing record-low returns across the region, The Financial Times reported.

Earlier this month, media reports also noted that the world's stockpile of negative-yielding debt swelled to a record after the US presidential election sparked a rally in global bond markets. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index rose to US$17.05 trillion on Nov 5, surpassing the previous peak in August 2019.

Asked why investors might be keen on negative yielding bonds, Andrew Wong, credit research analyst at OCBC, said that where investors believe that interest rates might fall amid a challenging economic outlook, the debt they hold may appreciate in price such that capital gains will exceed the negative interest component. "Another factor is that if the issuer or issue is strongly rated, then the price of the bond may also rise due to a flight to quality."

UOB's covered bonds are expected to be rated Aaa by Moody's Investors Service and AAA by Standard & Poor's Rating Services. The latest offering is the eighth series under UOB's US$8 billion global covered-bond programme.