Global rates roundup / chart-pack

Transcription

1 Global rates roundup 1 Aug 216 Interest rate strategy Global rates roundup / chart-pack DBS Group Research 1 August 216 NIRP and QE are in full swing. However, aside from the Bank of England, room for even more aggressive monetary easing by major central banks looks constrained As such, downside to already low developed market yields (JGBs & EUgov bonds) looks limited USTs still look attractive compared to developed market peers but Fed hike expectations bear watching The SGD swap curve is elevated, due in large part to the premium in the 6M SOR (floating leg) over the 3M SOR Sibors & SORs should come under upward pressure as Libors rise and the USD strengthens IDgov bonds have benefitted in the low yield environment. Shortertenor bonds are likely to outperform There is scope for 5Y CNgov bonds to outperform the wings (2Y & 1Y) CNH interest rates have been stable even as the RMB weakens. However, upward pressure is likely to emerge when the Fed hikes Global Rates While sentiment has bounced, 1Y yields are still sharply lower post- Brexit Speculation of further ECB and BOE easing are the key reasons why LT yields are so low Bonds with higher absolute yields generally performed better Change in 1Y Government Bond Yields since 22 June bps Developed Economies Emerging Asia US GE UK AU SG HK MY TH ID PH IN KR TW CN Eugene Leow (65) eugeneleow@dbs.com 1

2 Global rates roundup 1 Aug 216 United States Short-term USD rates have shrugged off Brexit woes and are starting to price in Fed hikes Some of this stems from stricter regulations on money market funds On balance, the market is still too dovish; we still expect 2 Fed hikes this year Implied Fed funds rate, Eurodollar futures & 3M Libor %pa M Eurodollar futures for end-216 3M USD Libor (rhs).25 Implied Fed funds Brexit (dotted rate for end-216 line). Jan-16 Apr-16 Jul-16 %pa The USD swap curve flattened post Brexit as longer-term rates settled lower USD Swap Curve % pa 1.75 As the 3M Libor pushed new highs for the year, the front of the curve has been nudged higher Jun Spot M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 1Y 1Y USTs are one of the highest yielding in the developed world With the universe of negative yielding debt still growing, longer-term USTs are relatively attractive UST curve flattening remains the most likely scenario as the Fed resumes normalization 1Y Government Bond Yields % pa JP GE FR UK CA IT US AU 2

3 Global rates roundup 1 Aug 216 Japan For JGBs, Brexit and the underwhelming BOJ stimuli just about cancelled each other out Post-Brexit, the market was looking for the BOJ to ease aggressively, pushing down short-term yields However, shorter-term JGBs sold off when the BOJ disappointed JGB Curve %pa Pre-Brexit Spot -.4 1Y 5Y 1Y 15Y 2Y 3Y 4Y Downside to JGB yields is starting to look limited Local investors are increasing looking abroad to avoid low / negative yielding JPY-denominated assets The JGB curve is vulnerable to steepening risks Securities investment abroad into medium & long-term bonds net JPY bn, 4wk rolling sum Jan-15 Jul-15 Jan-16 Jul-16 3

4 Global rates roundup 1 Aug 216 Singapore The 3M SOR rebounded after converged with the 3M Libor Sibors and SORs are likely to come under upward pressure as the Fed hikes rates and as USD strength reasserts 3M SGD SOR & 3M Sibor vs 3M USD Libor %pa 2. MAS flattens slope in 1.75 October No change 1.5 MAS MAS policy flattens in April 1.25 slope in January 1. MAS goes neutral in April M Sibor 3M SOR.25 3M Libor Fed liftoff. Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Beyond the very front of the curve, SGD swap rates trade significantly higher than USD swap rates The is due in large part to the stillsizable rate differential between the 6M SOR and the 6M Libor. SGD Versus USD Swap Curves % pa SGD Swap Curve 1..5 USD Swap Curve. 1M 3M 6M 12M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 1Y The SGD nominal effective exchange rate (NEER) is trading in the upper half of its trading band Further SGD strength appears limited, especially if Fed hikes loom SGD NEER Index Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 4

5 Global rates roundup 1 Aug 216 Indonesia With 1Y yields above 7%, IDgov bonds are very attractive relative to peers There is still room for IDgov bonds to outperform developed market bonds Yld spread of 1Y IDgov bond over ave 1Y G7 bonds bps 1,2 1, 8 IDgov spread 6 4 Ave spread since 29 2 Jan-9 Jan-11 Jan-13 Jan-15 Tax amnesty repatriation will be a tailwind to IDgov bonds, but a lot hinges on the magnitude of inflows The government s estimate for tax amnesty repatriation may be on the optimistic side Tax Amnesty Repatriation Tax amnesty repatriation (govt estimates) Foreign ownership of IDgov bonds Foreign reserves IDgov bonds outstanding USD bn The front of the IDgov curve offers a more attractive carry / rolldown profile Shorter-term IDgov bonds could also benefit from Bank Indonesia maintaining its easing bias IDgov Curve: 6M Carry & Rolldown bps running Rolldown Carry tenor

6 Global rates roundup 1 Aug 216 China The 5Y/1Y segment of the CNgov curve is flat while the 2Y/5y segment is steep There is scope for 5Y CNgov bonds to outperform the wings (2Y & 1Y) CNgov Curve - 2Y/5Y Segment vs 5Y/1Y Segment bps Y/5Y Spread Y/1Y Spread -25 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 The rebound in WPI should put some upward pressure on the CPI CN: Inflation % chg YoY Longer-term CNgov bonds are vulnerable to a rise in inflation expectations 1 5 CPI -5 WPI -1 Jan-5 Jan-1 Jan-15 The market appears to be comfortable with how the CNY FIX has been guided This has resulted in stable offshore interest rates CNH rates could come under modest upward pressure if Fed hikes prompt Asia FX weakness CNH HIbor & Forward Points % pa pts M CNH Hibor M CNH Fwd Pts 2 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 6

7 Global rates roundup 1 Aug 216 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 217f f 217f US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* Source: CEIC and DBS Research Policy & exchange rate forecasts Market prices Policy interest rates, eop Exchange rates, eop current 3Q16 4Q16 1Q17 2Q17 current 3Q16 4Q16 1Q17 2Q17 US Japan Eurozone Indonesia ,112 13,793 13,973 14,152 14,331 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,299 22,359 22,359 22,359 22,359 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea ,113 1,194 1,196 1,199 1,21 India ^ prime rate; * 1-yr lending rate Policy rate 1Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US S&P 5 2, Japan Topix 1, Eurozone Eurostoxx 2, Indonesia JCI 5,216.4 Malaysia KLCI 1, Philippines PCI 7, Singapore Ccy policy FSSTI 2, Thailand SET 1, China S'hai Comp 2, Hong Kong Ccy policy HSI 21, Taiwan TWSE 8, Korea Kospi 2,16.3 India Sensex 28,52.9 Source: Bloomberg 7

8 Global rates roundup 1 Aug 216 Recent Research IN: Hopes high for GST 26 Jul 16 JP: will the helicopters fly? 2 Jul 16 ID rates: steepening risk 18 Jul 16 IN: more consumption-led growth 13 Jul 16 FX: revisions to GBP & JPY 8 Jul 16 TW & KR: how low can rates go? 7 Jul 16 US: a risky mantra 4 Jul 16 PH: Duterte s game plan 4 Jul 16 EZ: dealing with post-brexit blues 3 Jun 16 SG: Brexit impact limited for now 28 Jun 16 Britain s Great Leap Backward 27 Jun 16 Brexit first impact 24 Jun 16 IN: maturing FCNR (B) deposits a molehill, 1 Jun16 not a mountain Qtrly: Economics-Markets-Strategy 3Q16 9 Jun 16 HK: cautious outlook 27 May 16 IN: monitoring external fault lines 25 May 16 TH: manufacturing gone cold 25 May 16 SGS: bracing for the Fed 24 May 16 Global: Where lies north? 16 May 16 CN: outbound investments intact 5 May 16 JP: perception gap widens 5 May 16 FX: USD down but not out 3 May 16 Rates: Global rates roundup / chart-pack 28 Apr 16 SG: national vs domestic growth 28 Apr 16 IN: investment cycle slows 2 Apr 16 ID: the new policy rate 18 Apr 16 IN: improving liquidity management 15 Apr 16 SGD: slipping into neutral 8 Apr 16 JP: reflation campaign still has a long way to go 8 Apr 16 CN: what are supply-side structural reforms? 7 Apr 16 CN: root causes and remedies for overcapacity 6 Apr 16 US: what is driving core inflation and 31 Mar 16 when will headline follow? EZ: watching Brexit risks 28 Mar 16 SG budget: balanced and transformative 28 Mar 16 ID: investment eludes 24 Mar 16 Rates: SGS premia compression 21 Mar 16 JP: rising direct investment in Southeast Asia 18 Mar 16 SG: a winter budget 14 Mar 16 Qtrly: Economics-Markets-Strategy 2Q16 1 Mar 16 IN: fiscal discipline trumps growth 1 Mar 16 Rates: G7 bonds - tantrums brewing 1 Mar 16 Global growth: what is potential and 25 Feb 16 where is it going? ID: BI easing bias persists 19 Feb 16 EZ: negative rates not a cure 17 Feb 16 US: how strong is consumption? 12 Feb 16 SG: the next growth driver 4 Feb 16 JP: BOJ into uncharted territory 2 Feb 16 CNH: will capital controls help? 2 Feb 16 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 8