Singapore's Policy Quirk Lures Bank Funding Rush

Global banks are rushing to sell bonds in Singapore, where unique monetary settings have opened a favourable borrowing window that puts the city-state's debt markets on course for the biggest year of bank-capital raising in more than a decade.

Singapore's central bank manages policy via its currency, rather than short-term rates, and one consequence has been the benchmark Singapore Overnight Rate Average (SORA) lagging a rise in comparable borrowing costs for U.S. dollars.

Unlike other low-rate destinations in Europe or Japan, the Monetary Authority of Singapore is also keen on keeping the Singapore dollar steady, reducing currency risk, and investor appetite has been strong.

Almost S$12 billion ($8.5 billion) has been raised in Singapore's debt markets from Jan. 1 to July 6, the largest for the period since 2019, according to Refinitiv data, with June the biggest month for issuance by value since Sept. 2021.

About half of the S$3.5 billion raised in June and a fifth of the year-to-date figure are "Tier 2" notes, issued by banks for reserve capital requirements - the biggest slice of this type of debt that Singapore has seen in over 10 years.

"Debt markets here are still quite well behaved, rates have not risen significantly," Daryl Ho, senior investment strategist at Singapore's DBS Bank, said at a briefing, in contrast to deteriorating conditions in bigger markets.

"Naturally, you'll attract a lot of issuers."

Through June, SORA, a volume-weighted calculation on unsecured interbank loans and a benchmark for longer rates, averaged about 1% against an average of just over 1.2% for overnight dollar LIBOR.

Private banks have led solid investor demand. UOB, the bookrunner for a S$900 million Tier-2 note for HSBC in June, said it was oversubscribed - with private banks the biggest buyers - and that 5.25% was a competitive price.

"The Singapore dollar trade was priced about 20 to 25 basis points tighter than what they would have achieved in the U.S. dollar market," said Carolyn Tan, UOB's head of debt capital markets for bonds. HSBC had no comment.

Lenders such as BNP Paribas, ABN Amro and Barclays also sold debt in Singapore dollars recently. Barclays' S$450 million alternative Tier-1 deal last week had a coupon of 8.3%, against a coupon of 8.875% on ?1.25 billion ($1.5 billion) raised a week earlier.

"I would expect a lot of bank treasurers would look at this market very closely," said Ken Wei Wong, Barclays' head of Asia-Pacific fixed income syndicate.

"There is momentum ... given the dislocation in G3 (currencies)."

Money-market futures are priced for that to continue, with three-month eurodollar futures, which track the cost of borrowing U.S. dollars abroad, showing traders see interest rates hitting 3% by year's end.

"Financial institutions are likely being pro-active," said Andrew Wong, vice president of credit research at OCBC Bank in Singapore.

"For now, the Singapore dollar market is relatively cheaper than other markets so as long as this dynamic holds then we expect financial institutions will continue to issue in Singapore dollars."

($1 = 1.4016 Singapore dollars)

($1 = 0.8331 pounds)