Singapore’s snowballing cash levels are boosting local bonds

[SINGAPORE] The recent build-up of cash in Singapore’s money market is strengthening demand for the nation’s bonds, driving returns to near the highest in the region.

The cost of borrowing in the interbank market fell to the lowest since June 2022 this week, after tumbling more than 70 basis points in August. Inflows driven by expectations of further currency strength, dwindling net bill sales and slower loan disbursals have enhanced the city’s cash levels, a mix that’s likely to keep overnight rates subdued.

Adding to the city’s cash levels are foreign investments into Singapore’s bonds, which are underpinned by the city-state’s top credit rating. The securities are increasingly viewed as safe-haven alternatives to US assets amid concerns over US President Donald Trump’s fiscal policies.

“Singapore dollar liquidity conditions could remain flush in the near term amid demand for AAA-rated currency markets,” and restrained property loan growth, said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore.

He expects the Singapore Overnight Rate Average to fall further in the short term.

The Monetary Authority of Singapore (MAS), which uses the exchange rate as its main policy tool rather than interest rates, eased policy in January, and in April in the face of US tariffs. It kept the policy unchanged in July, and said that it will maintain the prevailing rate of appreciation of the Singapore Dollar Nominal Effective Exchange Rate policy band.

“The MAS’s appreciation stance for Singapore’s FX-based policy, which has the tendency to attract capital inflows, adds to this,” McNicholas said, referring to the city’s ample cash levels.

However, an unexpected policy easing by the MAS in October will pose a risk to excess liquidity, he said. “This could take the form of a shift to a neutral stance, or even a re-centring lower of the target band that adversely impacts currency return expectations.”

The Singapore dollar is expected to strengthen to 1.27 per greenback by mid-2026, according to a median of strategists surveyed by Bloomberg. It was around 1.2883 at 5.30 pm in Singapore on Wednesday (Sep 3).

Measures from authorities to cool the property market have slowed lending, pushing the city-state’s loan-to-deposit ratio to 65.9 per cent as at July, according to MAS data. That’s the lowest in data going back to 2021.

The MAS issued S$20.9 billion of bills as at the end of August versus the average net supply of S$51 billion in the previous four years. That’s left traders with excess cash, much of which is flowing into the bond market.

An auction of a 2030 bond last week drew a bid-to-cover ratio of 2.66 times, the highest in a year for the tenor. A Bloomberg total return index of Singapore bonds has handed investors a gain of 16.6 per cent this year, the most in emerging Asia after Thailand.

Frances Cheung, head of FX & rates strategy at OCBC, sees Singapore’s 10-year bond yields staying around the current level of 1.85 per cent until year-end.

“Singapore government bonds remain an appealing asset for both domestic and foreign investors,” she said. BLOOMBERG