Heatmap of Daily Changes

Transcription

1 Victor Yong Global Economics & Markets Research URL: Rates Insights Lower Yields, Flatter Curves. No Easy Ride For Consensus Thus Far. Friday, Heatmap of Daily Changes Singapore Malaysia Thailand Indonesia China HKD Hong Kong CNH Equity (%) 0.2% 0.8% 0.2% 0.3% 0.4% 0.2% USD_Asia FX (%) 0.4% 0.2% 0.1% 0.0% 0.7% 0.0% 0.3% Money Markets () Short End IRS () Long End IRS () *Table is read horizontally. Price increase in Green. Price decrease in Red. Color intensity corresponds to rank. Market Summary SORs are implied to fix lower by around 2.1, 2.5 and 2.9 in the 1M, 3M and 6M tenors respectively tonight based on the closing swap levels. UST yield gained 1.8 during SG trading hours and this ran counter to it's overnight US session which saw yields moving lower. Turning to domestic markets, the performance today was consistent across both markets with yields shifting lower; IRS 5 and SGS 4.9. SG curvature performance today saw the 2s10s flatter by 0.8 in IRS and flatter by 0.2 in SGS. Regional yields today fell in Malaysia, Thailand, Indonesia, China, Hong Kong, and in terms of magnitude of change the day's biggest yield drop was 5 which was seen in HKD IRS. Major Indices SG Hours UST Bunds USD Index (DXY) USD Index (ADXY) Brent Oil Asia ex Japan Equities Open Close Change % 0.56% 0.16% 0.07%

2 2 P a g e Today s Highlights SG IRS daily change vs. 1M SD +1SD 1SD Today Y 5Y 15Y 20Y 30Y SG rates daily changes % IRS past month 3.00 IRS 1SD Ave +1SD Dec 11Dec 13Dec 15Dec 17Dec 19Dec 21Dec 23Dec 25Dec 27Dec 29Dec 31Dec 2Jan 4Jan 6Jan SG vs US (IRS semis) cross market spreads 0.0 SGS IRS 60 6Jan17 5Jan Y 5Y 15Y 20Y 30Y 20 1Y 2Y 3Y 5Y 7Y 15Y 20Y 30Y US non farm payrolls (NFP) NFP releases will always matter in terms of price impact potential especially if there was any significant surprises, but it does appear that given recent shifts in the investment narrative towards reflationary themes, US payrolls releases may have slipped down the rankings of critical data to watch. Nonetheless, investors will likely be interested in the wages components from tonight's NFP release, since any positive surprises here could have a bigger impact on FED funds expectations than the headline employment number. Further signs of wage inflation will only become more entrenched when expected fiscal spending comes online latter this year and this could prompt investors to reprice for a more hawkish FED. SORs USD spot FX was sensitive to changes in the USDCNH spot FX since yesterday's sharp moves by the latter. USD FX swaps managed to display more restraint with their intraday price adjustments with 1M to 6M prices all lower than their previous day's close while also managing to avoid weakening past yesterday's intraday lows. SOR convergence with SIBOR has been achieved, which may be more of a statement of fact rather than conveying useful information content. Over the past year 3m SOR vs. SIBOR spread has been as wide as +50 to as low as 40 and this has had little difference on the rate of adjustments in SIBORs nor the mean reversion tendencies in SORs. Reversal of seasonality impact is largely complete now that SORs are roughly back in line with levels post December's FED hike. Demand for USD funds will need to become more urgent going forward in order to drag SORs equilibrium levels lower. Without this catalyst, we see 3M SORs in the 0.80s zone as being within the fair value range until proximity to the next FED hike starts to exert its pull once again. Volatility around this equilibrium could remain high in the short term as markets reckon with the CNH short squeeze and the upcoming inauguration day. SGS and IRS Now that volatility in SG bondswap spreads have started showing signs of stabilizing what looks likely to take over as flavour of the moment? Taking inspiration from what has happened recently to the long USDCNH consensus trade, similarly lopsided positions/sentiments in rates space also needs to avoid being overly complacent even if the potential magnitude of any squeeze here is unlikely to be as violent as that experienced by USDCNH. Based on CFTC net noncommercial positions, shorts in

3 3 P a g e Eurodollar futures and UST are still large by historical standards, which points to higher rates views in general and steeper curves in the initial phase as potential candidates for consensus pain trades. IRS in both SG and US have weakened past their December FOMC level and are currently in line with post November US election highs. Support should become more apparent on further yield weakness going forward since a failure to hold the Trump win highs will become more troublesome for the "yields are going higher" consensus as they may have to contend with up to another 40 of retracement. The story is similar for the 2s10s IRS curves in both SG and US, although the urgency to hold the line might be greater in curve steepeners than the outrights given that current levels in the former are closer to threatening their short term upwards trending line. SGS auctions and its surroundings Next Auction: Reopen 2Y (NX09100W 01 June 2019) Announcement date: Thursday, 19 Size: T.B.A Auction date: Thursday, 26 Retap of June 2019 (2Y) in a nutshell Activity levels in the 2 year region remain healthy, though once again mostly coming through in the afternoon session. Price impact was more muted without the spillover shock from China to catalyze the SGS markets today. We're neutral June 2019 yield at these levels until more information on underlying demand is revealed by the auction size announcement. June 2019 yield: 1.48% June 2019 vs 2Y SGS spread: 24 June 2019 vs 2Y UST spread: 30 June 2019 vs 2Y SG IRS spread: 20 Daily Change: 3.0 Daily Change: 0.5 Daily Change: +1.0 Daily Change: 0 Size observations * Outstanding issuance size of NX09100W is 6.4bio. This compares to 6.8bio of stock in the existing on the run 2Y benchmark (September 2018). Prevailing stock levels appear adequate given that neither of the bonds have displayed tendency for trading special (i.e. price richness) over the past month. * Average 2Y auction size over the past 2 years has been about 2.4bio, omitting the mini auction retap in The average bid to cover over the same period has also been fairly robust at 1.97 times. * The first SGS auction of the new year looks likely to establish a new high water mark for outstanding issuance size, currently at 8bio held by the Jun 2021 bond, considering that 2Y SGS auction sizes below 1.6bio has not been seen since Yield observations * The top side of June 2019 yield range over the past month is 1.62%, which is a level that will have mostly priced in expectations for 2 to 3 FED hikes in * 2Y SGS yield has been positively correlated to both 2Y UST yield and USD spot FX due to upgraded expectations for FED hikes. * Risk of negative feedback loop between SGS yield and USD spot FX has eased slightly with their correlation stabilizing despite the USD spot FX continuing to push new highs. A yield spike/currency depreciation scenario cannot be dismissed at the moment especially when regional currencies are also pressured by a dominant strong USD narrative. Key notes on 2017 SGS cash flows * March/September are chunky coupon months for SGS with 646.1mio to be distributed. * February/May/August/November are dry months for SGS coupons. * No new coupons will be added to dry months in * Maturities for 2017 total 10bio due in April ( 7.5bio) and October ( 2.5bio).

4 4 P a g e Rates Strategy Inception Date Currency Type Format Entry Stop Target Rationale at inception SGS outperform short UST vs long SGS Arguments for higher yields into 2017 are predominantly US centric. This being the case and in combination with our macro team s lukewarm but not recessionary growth outlook for Singapore, conditions are supportive of a lower beta SG rates market response to US rates changes on average in Therefore we expect to see UST SGS spread moving further into positive territory over the course of Steepener 5s10s SG IRS Trumpflation is expected to have negative implications on US deficit, which will drive a greater appreciation of duration risk and richer term premiums. For 2017 we expect to see the term premium repriced to a higher equilibrium level. From a SG rates market perspective, a steeper 5s10s IRS curve will be justified in the above scenario at least until the FED demonstrates a significantly more hawkish stance. Steepener 2F1Y vs 1F1Y SG IRS Anticipated fiscal policy boost will contribute towards making the long espoused FED rate normalization a more credible objective in Rate hike expectations will likely shift in favour of a steeper rate hike trajectory when the new Trump administration announces their policy details. We expect to see the follow through repricing having a greater impact on the curve beyond 2018 since it is assumed that the FED will remain conservative and data dependent. The 2 year forward 1Y SG IRS will outpace the 1 year forward 1Y SG IRS when the aforementioned repricing in FED rate hike expectations takes place in 2017.

5 5 P a g e Rates Benchmarks SG Session Change () Country Benchmark Open High Low Close 1D 1M 1Y IRS US UST s10s UST SG MY TH ID CH HK IRS SGS s10s IRS IRS MGS s10s IRS IRS THB Bond s10s IRS IDR Bond s10s Bond IRS 7D repos CNY Bond s10s IRS IRS HKD Bond s10s IRS Y CNH CCS Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. Singapore Company Reg No Z