US bond yields are going up, and here's what it means for Singapore

The yield for 10-year Singapore government bonds also jumped 58 bps YTD to 2.58%.

The recent rise in government bond yields around the world may be a US-centric phenomenon, and Singapore is riding the wave, UOB Kay Hian said.

According to a report, the rise in government yields could be attributed to the record issuance of US treasury bills and government bonds to finance the enlarged budget deficit post-Trump inspired cut in corporate tax rate from 35% to 21%.

UOBKH analyst Jonathan Koh also noted that there were concerns that trade conflicts would reduce China’s trade surplus with the US, thus reducing demand for US treasury bills and government bonds from China. “Future hikes in US interest rates would increase the burden for the US to service its national debt,” he added.

As a result, yield for 10-year US government bond spiked by 58 bps YTD to 2.99%. Corporate bonds were also affected as yields for investment grade and high-yield US corporate bonds jumped 77 bps and 63 bps to 4.02% and 6.35%.

This contagion spilled over to Singapore, Koh noted. The yield for 10-year Singapore government bond jumped 58 bps YTD to 2.58%. Yield for the Bloomberg Barclays Singapore Total Return Index, encompassing both government bonds and corporate bonds, increased 47 bps YTD to 2.45%.

“Higher yields for corporate bonds would have a positive impact on pricing for corporate loans,” Koh said.

Meanwhile, there are concerns that the US labour market is tight and wage inflation could pick up, prompting faster hikes for Fed funds rates. “There are widespread expectations of rapid and successive hikes in US interest rates, driving strength in the US dollar,” Koh added.

The analyst noted that there a concurrent sell-down of regional currencies across emerging markets since mid-April, similar in direction but smaller in magnitude compared to the taper tantrum in 2013.

“In Singapore, the strength of the US dollar is usually a booster for higher swap offer rate (SOR), which has a positive knock-on impact on Singapore interbank offer rate (SIBOR). The strengthening US dollar caused steep rise in both the SOR and SIBOR during 2H2014 and 2015. Recent strength in the US dollar, if sustained, should also be a booster for the SOR and SIBOR,” he said.

UOBKH said the risk for domestic interest rates is on the upside for banks. “Higher yields for corporate bonds provide support for high loan yields,” Koh concluded.