The popularity of Singapore government bonds has surged in recent weeks as investors seek refuge in safe havens, while playing on the appreciating Singapore dollar.

The signs? Bond yields have fallen to record lows almost across the board as bond prices rise on the back of strong demand. The drop in yields was particularly evident yesterday.

The yield of 10-year Singapore Government Securities (SGS) sank from Monday’s 1.81 per cent to 1.62 per cent – beating the previous trough of 1.72 per cent in January 2009 when the world was reeling from the financial crisis.

The 20-year SGS yield dipped from Monday’s 2.54 per cent to 2.38 per cent – again breaching an earlier bottom of 2.5 per cent. The 5-year and 15-year bond yields also reached new lows.

Several factors have driven investors towards Singapore government bonds. The eurozone debt crisis continues to fester, while the US flirted with a debt default earlier this month as politicians fought over plans to raise the government’s borrowing limit.

But what really roiled sentiment this week was Standard & Poor’s (S&P) cutting the US credit rating to AA+ from AAA. This has burnished the attractiveness of Singapore government bonds, backed by the country’s AAA credit rating.

With debt problems in the US and European Union, coupled with fears of a double-dip recession, ‘the safest haven in the ongoing flight to quality would be to AAA-rated countries outside of the Western hemisphere’, said OCBC economist Selena Ling.

Supporting this view, doubts have surfaced over the stability of other developed nations’ credit ratings. In a report on Tuesday, Citigroup chief economist Willem Buiter went so far as to say that other AAA-rated Group of Seven (G-7) sovereigns face risks of a downgrade.

In France, especially, public debt is high and there is popular resistance to welfare cutbacks.

‘We could be moving towards a world without AAA G-7 sovereigns,’ he suggested. ‘The criteria applied by the rating agencies to the G-7 sovereigns in the past have been, in our view, far too lenient.’

What makes Singapore government bonds stand out further is the strengthening Sing dollar.

To cap inflation, the Monetary Authority of Singapore (MAS) has allowed the currency to rise and it has increased by around 10 per cent against the US dollar in the last one year.

‘In a world where AAA-rated sovereigns are becoming scarcer, we would not be surprised if real money players and even reserve money managers have increasingly diversified into SGD assets,’ said Citi economist Kit Wei Zheng in a report last Friday.

Market watchers see demand for Singapore government bonds remaining strong if financial markets stay choppy, and if MAS maintains or tightens monetary policy.

Nevertheless, ‘I would also caution against hopping on the SGS bandwagon at this juncture since real interest rates are currently in deeply negative territory’, OCBC’s Ms Ling said.

Singapore’s consumer price index rose 5.2 per cent in June over the previous year.

SGS yields were not the only rates which dropped yesterday. United Overseas Bank (UOB) noted that short-term Swap Offer Rates (SOR) fell into negative territory for the first time – the three-month SOR, for instance, hit minus 0.0119 per cent.

Economists Chow Penn Nee and Suan Teck Kin cited several factors for this: the US Federal Reserve indicated that it would keep the federal funds rate low till mid-2013; the US dollar is expected to weaken against the Sing dollar in the coming months; and investors will continue to flock to safe havens such as Singapore.

‘With all these concerns still likely to persist in the short to medium term, this will exert a downward pressure on SOR,’ they said.

The three-month SOR is a popular benchmark used for home loans, and so is the three-month Singapore Interbank Offered Rate or Sibor. The latter remained unchanged yesterday.

The bonds total $74 billion and have maturities of at least two years

THE Singapore Exchange (SGX) will list 19 Singapore government bonds from July 8 as part of its deeper push into the fixed income market.

SGX, which primed the market for the listing of government bonds a year ago, selected 19 bonds with maturities of at least two years and totalling $74 billion.

‘This initiative is expected to improve price transparency and liquidity in Singapore government bonds, and provide investors with a safe investment alternative that can give both capital protection and steady returns,’ SGX said in a press release yesterday.

Market markers would also be available to help to raise liquidity, added Tng Kwee Lian, head of fixed income at SGX.

A market maker refers to a broker that competes for orders with another market maker by displaying buy and sell quotations of the units of the fund, thereby tightening spreads.

Bonds are debt securities that governments and companies issue. In return for the loan provided by the bond holder, the bond issuer pays out an interest based on a coupon rate and later repays the principal at the bond’s date of maturity.

The minimum investment in a Singapore government bond is $1,000.

Of the 19 securities, the bond with the farthest maturity date – Sept 1, 2030 – has a coupon rate of 2.875 per cent. The coupon payment – made every six months – ranges from 1.125 per cent to 4 per cent for the 19 bonds.

The trading fees for stocks will also be applied to government-bond trading. SGX charges a clearing fee of four basis points on the value for most contracts, or a maximum of $600.

Singapore government bonds are issued by the Monetary Authority of Singapore (MAS) through periodic primary auctions and though unlisted, can still be traded through more than 10 banks, the central bank’s website showed.

These include the three local lenders, Standard Chartered Bank and HSBC, which are tasked to quote two-way prices under all market conditions.

Brokers are uncertain about the demand for government bonds, though one broker from Kim Eng Securities said that he gets enquiries from his clients about government bonds from time to time. SGX will also make its rounds to brokerages to introduce the listing of government bonds over the next few weeks, brokers told BT.

Proceeds from the issue of Singapore bonds are not used to finance government expenditure, as it is done in many countries, but are paid into a government securities fund, MAS noted.

From the fund, any interest and principal repayments on the bonds are withdrawn. A government bond market is typically used as a benchmark for the corporate bond market.

The bonds must be held by SGX’s central depository (CDP) as custodian before they can be traded. The CDP has been a custodian of individual investors’ government-bond holdings since April last year.