Market Summary Over the past week, 3M SOR decreased by -0.6bps, 3M SIBOR was unchanged 0bps and 3M LIBOR increased by 0.6bps.

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1 Victor Yong Global Economics & Markets Research URL: Tuesday, 10Y UST Positioned On The 2.30 Line Awaiting Resolution From Event Risks. Rates Insights Market Summary Over the past week, 3M SOR decreased by -0.6bps, 3M SIBOR was unchanged 0bps and 3M LIBOR increased by 0.6bps. The 1M vs. 6M SOR curve steepened by 2.7bps and the 3M SOR vs SIBOR spread contracted by -0.6bps. 10Y has outperformed vs. UST and outperformed vs. SG IRS. The 10Y SG IRS yield increased by 2bps, which was less than 1 std dev based on historical yield changes over the past month. The 5Y vs. 30Y SG IRS curve closed today at 0.73 and has steepened by 0.5bps over the past week Week Benchmark Yield Changes UST SG IRS Weekly Yield Change Relative To 1 and 2 Standard Deviation Bands IRS Y 5Y 10Y 30Y Y 5Y 10Y 15Y 30Y 10Y SG IRS 2s10s SG and US IRS Curves Apr 11-Apr 18-Apr 25-Apr May SG (lhs) US (rhs) 25-Apr 26-Apr 27-Apr 28-Apr 1-May 2-May

2 2 P a g e Money Market Rates Historical Volatility Annualized () 30D 90D 180D Historical Volatility Annualized () 30D 90D 180D 1M SOR M SOR M SOR M SIBOR M SIBOR M SIBOR FOMCs back online After a break in April, investors' attention on US monetary policy returns this week with FOMC on Thursday (2am SGT). 3M US Libor has already come out of its hiatus at 1.15 since mid March to fix higher by 2bps on the last day of April and we expect that this marks the start of the next leg in US Libor re-pricing. After all, the messaging from FOMC members during their month off has been consistent in affirming that more rate hikes this year remained a valid expectation and this has helped June implied probabilities recover from their mid month slump to close higher for April despite US GDP disappointment. On the other hand the OIS and Eurodollar futures (red vs. green) curves have yet to recover fully from their declines in the first half of April, which leaves scope for re-pricing should Thursday's FOMC prove more hawkish than expected. SORs weighing Libors against volatility Against a backdrop of steadily higher US Libors, SORs will also be biased higher ceteris paribus. However, USDSGD FX swaps have been drifting lower to offset higher US Libors such that the 3M yield spread between Libor and SOR closed April at its widest levels this year. Deepening SG yield discount has been consistent with EM inflows/carry trades that had gained favour with investors over the past couple of months. A contributor to the trade has been suppressed currency volatility; 1M USDSGD implied volatility closed April at its lowest levels since October 2014 and the situation is repeated with the ratio of SGD spot FX's historical volatility between 1M and 1Y. Given prevailing levels and mean reverting dynamics, the potential for further sharp declines in currency volatility to drive SORs lower is more likely a tail risk event. Therefore, our base case expectation favours SORs turning higher at a measured pace. Short term view: * 3M SOR to recover from post March FOMC weakness and settle between 0.90 and 1.00 for April. * US Libors to resume its grind higher after crossing over into May. Daily changes in 3M SOR Attributed bps FX Swap Libor SOR UOB SGD NEER Deviation From Mid Point 1M USDSGD risk reversal SGD NEER deviation (rhs) Apr 20-Apr 21-Apr 24-Apr 25-Apr 26-Apr 27-Apr 28-Apr 2-May

3 3 P a g e Bonds and Interest Rate Swaps Asset Swap Spreads Benchmark Tenor Current T - 1 T - 2 T - 3 T - 4 T - 5 SIGB 2 1/2 06/01/19 2Y SIGB 1 3/4 04/01/22 5Y SIGB 3 1/2 03/01/27 10Y SIGB 2 7/8 09/01/30 15Y SIGB 2 1/4 08/01/36 20Y SIGB 2 3/4 03/01/46 30Y FOMC balance sheet reduction Besides rate hike implications from FOMC, investors will also be focusing on any further details regarding the timing and form of balance sheet reduction. The issue has been slowly gaining momentum, although it's impact on pricing has been far less clear. Using the 10Y UST term premium as illustration, it has been on a declining trend since the start of 2017 and has flipped into negative from mid March. This divergence between balance sheet reduction risk and price has largely been a hostage to investors becoming disillusioned with the US led reflation narrative. Arguably a moment of catharsis has been reached in unwinding reflation positions given that the latest CFTC data shows the largest 10Y UST long net non-commercial positions since This leaves the field clear for prices, term premiums in particular, to respond to any hawkish balance sheet revelations at Thursday's FOMC. 10Y SG IRS The 10Y SG IRS has been keeping pace with 10Y US IRS over the past week with scattered days of outperformance. Upside momentum in the 10Y SG IRS is at risk of stalling since an incremental push will likely be required to get the yield past its 200D moving average (at 2.43) followed by the 62 retracement line (from 09 November low to 28 December top). Besides US yield changes, 10Y SG IRS could also be boosted if event risks this week triggered USDSGD volatility spikes. 2Y SG bondswap spread The 2Y has been trading on the cheaper end of relative value compared to both SG IRS and 2Y UST. Structural underperformance in the 2Y is unwarranted based on the SOR vs. Libor spreads as well as the auction calendar for the rest of 2017, therefore we consider the recent poor showing by 2Y as temporary and likely a reflection of reflation disillusionment diverting demand to longer durations. We continue to like long positions in the 2Y SG bondswap spread and will look diversify into the 2Y vs. UST spread at parity. Short term view: * 10Y UST hugs close to 2.30 in a bid to build the case for a return to the 2.30/2.50 range. If FOMC and NFP outperforms expectations, that would provide a narrative boost to complement the technical backdrop. * Upside yield correlation between 10Y benchmark and UST will be negatively impacted by currency volatility as well as 30Y auction flows.

4 4 P a g e Bond Yield Curves as at 0 Asset Swap Spread Curve Y 5Y 10Y 30Y UST bps ASW (-1week) ASW (current) The Next Auction Next Auction: 30Y re-open 01 March 2046 (NA16100H) Size Announcement Date: Monday, May 22, 2017 Auction Date: Monday, May 29, 2017 Auction Size: T.B.A * Max auction size: SGD 2.1bio. Minimum auction size: SGD 1.2bio (excluding mini-auction) * Overall weighted average bid to cover: 1.88 times. New issuance w.ave bid to cover: 1.92 times. Re-open auction w.ave bid to cover: 1.83 times. Since the introduction of 30Y maturity back in April 2012, the auction cut off yields has been surprisingly stable with a high low range of 2.76 to The only exception was last year 30Y mini auction in October which cut at 2.27 and has the dubious distinction of only being in the money for 1 day post auction. This is not to suggest that historical auction cut offs are a realistic concession target for the upcoming 30Y auction, rather it is the outlier yield cut that ought to serve as a reminder that whilst 30Y is justifiably special this "specialness" does not mean that no price is too high to pay for the privilege of ownership. Including all previous 30Y auctions, bond yields have increased on average by around 13bps from levels prevailing 20 trading days ahead of auction day. Peak concession has typically been on the 3rd trading day before auction and the 30Y tends to mount a last minute rally as Primary Dealers look to take some risk off the table. Previous 30Y auctions - Size and Demand Average cumulative 30Y yield change before auction SGD mio Apr-12 1-Mar-13 2-Mar-15 1-Mar-16 1-Nov-16 Auction Size (lhs) Bid to Cover (rhs) D -17D -15D -13D -11D -9D -7D -5D -3D -1D

5 5 P a g e Auction Dashboard Mar 2046 closing yield (): Mar 2046 ASW (bps): Mar 2046 vs 30Y UST (bps): s30s (bps): 29.9 Weekly Change (bps): 3.7 Weekly Change (bps): 1.3 Weekly Change (bps): 1.0 Weekly Change (bps): Y closed today higher by around 10bps from its year to date lows set in mid April but remains a significant distance from the 2.77 average 30Y yield since its inception back in The 30Y yield spread against 30Y UST has also been hugging close to year to date wides since March and this wide spread has not been sustainably challenged despite back to back long maturity issuances in. 30Y regressed on either the 10Y or 30Y UST is a fair distance under the regression line and even if US yields were to decline by 20bps, the prevailing 30Y will still be on the rich end of the scale. Changes in the 10s30s curvature have also been limited and points towards complacency. Over the past month 10s30s is around 7bps steeper, most of which taking place from 20th April. At its prevailing 29bps, the 10s30s curve is close to its 38th percentile of its past year's range. Auction bias * Stay long 10s30s curve steepener, curvature change remains skewed in favour for stable to steeper curve ahead of supply. * Tactical auction shorts preferred at prevailing levels (2.40). Stops at 2.30 and targets at 2.50 or at auction cut. Notes on 2017 Cash Flows * March/September are chunky coupon months for with SGD 646.1mio to be distributed. * February/May/August/November are dry months for coupons. * No new coupons will be added to dry months in * Maturities for 2017 total SGD 10bio due in April (SGD 7.5bio) matured and October (SGD 2.5bio). Coupons for 2017 Maturity for 2017 SGD Millions January February March April May June July August September October November December SGD Billions January February March April May June July August September October November December

6 6 P a g e Rates Biases Inception Date Currency Type Format Entry Stop Target Rationale at inception 3-Apr-17 SGD Widener 27-Mar-17 SGD Steepener 20-Jan-17 SGD Steepener 3-Jan-17 SGD outperform 3-Jan-17 SGD Steepener Long 2Y (Oct 2019) vs. Pay 2Y SG IRS Short 30Y Bmk vs. Long 10Y Bmk Long 5Y (Oct 2021) vs. Short 20Y (Aug 2036) short 10Y UST vs long 10Y 5s10s SG IRS 18bps 10bps 30bps 23bps 13bps 40bps 86bps 82bps -1.5bps 75bps - 20bps 103bps 30bps 48.5bps 40bps 70bps Outright levels have fallen to the region that is consistent with SOR volatility suppression, thus limiting the extent of further IRS led spread tightening. No cause for to structurally underperform IRS. 10s30s curvature steepening bias due to 30Y supply in May. Main drawdown catalyst will be from risk aversion spikes that trigger short covering in the 20Y region. curve is flat relative to inflation expectations and could benefit from any near term inflation overshooting fears. Switched from 5s15s to 5s20s on 16 February to fade the 15s20s curve inversion of -4bps. 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 10Y UST spread moving further into positive territory over the course of 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.

7 7 P a g e Benchmark Levels Country Rates Current 1 week change 1 month change 1 year change 3M Libor () Y Bond () USD 10Y Bond () Y IRS () s10s Bond curve (bp) M SOR () Y IRS () SGD 10Y IRS () Y Bond () s10s IRS curve (bp) M Klibor () Y IRS () MYR 10Y IRS () Y Bond () s10s IRS curve (bp) M Bibor () Y IRS () THB 10Y IRS () Y Bond () s10s IRS curve (bp) M Jibor () IDR 2Y Bond () Y Bond () s10s Bond curve (bp) 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

Rates Insights SGS Curve Steeper over the Past Week but Repricing could Plateau until Auction Size Announcement

Rates Insights SGS Curve Steeper over the Past Week but Repricing could Plateau until Auction Size Announcement Victor Yong Victor.YongTC@UOBgroup.com Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Monday, Rates Insights Curve Steeper over the Past Week