Singapore Rates Monthly

Size: px

Start display at page:

Download "Singapore Rates Monthly"

Holly Harris
6 years ago
Views:

1 % Victor Yong Heng Koon How Global Economics & Markets Research URL: Summary Domestic money markets were volatile in January, we look for consolidation ahead. SG yield curves steepened significantly as improved liquidity helped the front end outperform, while the back end repriced higher in a synchronized fashion with global yields. 5Y SGS auction cut at 1.86% with bid to cover at 1.97 times, also our thoughts on 30Y SGS reopening in February. SIBORs And SORs Monthly Change () Sibor Sor MAS Bills US Libor 1M M M Data as of 29 January M SOR vs. LIBOR Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 6M Sor 6M Libor The months of December and January were the most volatile phase for domestic money market rates in recent times. A more acute year end seasonal liquidity demand as well as higher US Libors due to 14 December s 25 FED rate hike caused 3M Sor and Sibor to spike higher by 11 and 30 in the last 2 weeks of This increase in domestic money market rates was completely reversed, and more, by the end of January as liquidity conditions turned significantly more favorable due to Emerging Market inflows enabled by accelerated weakness in the USD. We view the sharp corrections in domestic money market rates as having undershot fundamentally justified values. The correlation between changes in Sor and changes in the Nominal Effective Exchange Rate (NEER) basket of currencies and interest rates has broken down over the past month as the weakness in Sors ran counter to implied strength in the basket. Qualitatively, it is clear that not only are the US base rates heading higher, but a weighted average of our trading partners interest rates also look set to increase too. Thus, other than in the unlikely scenario of aggressive monetary policy tightening monetary by MAS causing a surge in SGD strength, prevailing levels in Sors have undershot fundamentals by our standards. That being said, the task of picking when domestic money market rates will reprice higher in the short term is fraught with uncertainties. We can point to the obvious event risk, March FED hike, as a likely catalyst for repricing higher to begin but while the market s risk appetite remains undeterred, there remains potential for inflows to pressure Sor rates lower. Instead of a narrow focus in picking short term turning points, it is far more important to bear in mind that the medium term path for domestic money market rates points higher. This upward trajectory is based on evidence that global growth has broadened and with that there is an increase in countries that is crossing/has crossed over into the monetary policy normalization camp. The underlying macro drivers in the medium term are not normally as fickle as capital flows.

2 % SGD mio USD mio MAS bills supply increased in January, bid to covers more in line with historical averages The average amount of MAS bills auctioned in January was SGD Liquidity Management increased by SGD 150mio, or around 4.5%, to SGD 3.47bio 4,000 compared to December s average of SGD 3.32bio. Demand for MAS bills was robust in January as evidenced by the high bid to covers. For example, 1M bills on 09 Jan recorded a bid to cover of 4.44 times which was above the 95 th percentile for 1M bill auctions since Over the same time period, there has only been 13 other occasions where the bid to cover was above 4 times. The calibrated increase in average weekly MAS bill auction sizes in January has been successful in normalizing the bid to cover ratios down towards their historical averages. With a more balanced demand and supply auction situation, the auction cut off yields has also moderated their declines. To wit, double digit drops at the beginning of the month has slowed to low single digit weekly fall in the 1M and 6M tenors while the 3M remained unchanged at the last auction in January. Looking ahead, given that the supply response in January has already achieved a more balanced auction market and addressed the decline in cut off yields, we do not see a strong case for shifting the current neutral supply and demand settings into a restrictive one. Furthermore, with the FED virtually certain to hike in March, there may already be yield supportive forces in the pipeline. 3,000 60,000 50,000 40,000 30,000 2,000 20,000 Mar-17 Jun-17 Sep-17 Dec-17 Average MAS bills auction size (lhs) MAS forward book (rhs) March FED hike priced in, Eurodollar futures curve steepen Fed Funds futures have kept faith with a March FED hike since the start of Admittedly, this expectation was an easy one 100 to keep when the risk environment was as benign as it was in 90 January The implied rate hike probability could see more variability between now and the March FOMC considering that higher yields in the longer end of the curve is prompting investors to 1-Jan 6-Jan 11-Jan 16-Jan 21-Jan 26-Jan become more circumspect. However, we believe that any Mar hike probability (lhs) ED 4 v 8 curve potential wobbles in short term risk appetite should not have a material influence on the March rate hike outcome since tightening is more than justified based on growth and inflation dynamics. One of the more notable changes at the front of the US curve has been the steepening in the Eurodollar futures curve (4 th vs 8 th contracts) in January. This curve steepening has stalled just under 30 in the last week of January but nonetheless still represents the curve s longest stretch at these elevated levels since October Should the Eurodollar curve steepening persist, then it may be a sign that investors are pricing in greater uncertainty around the longer term FED rate normalization path. Singapore Government Securities And Interest Rate Swaps FED Hike Probabilities IRS Monthly Change Yields have repriced significantly higher over the past SG US EU UK JP () month in a nearly synchronous fashion. What has and 2Y continues to drive the upward spiral is a combination of more durable and broad based growth expectations as well 5Y as upgraded concerns over the prospect of inflation turning 10Y higher. 15Y Y At various points, the repricing process was further fueled by speculation over bond demand from Central Banks. 30Y Interestingly, despite the significant increase in yields and legitimate concerns over bond market supply and demand balance, spill over into other asset classes has been minimal as at the end of January. The yield repricing process itself also differs in terms of response from implied rates volatility, which have been rather muted compared to previous yield shock events such as 2015 s Bund VaR shock and 2013 s Taper Tantrum. Even 2016 s Trump election victory produced a more significant volatility response compared to the present Global Yield Repricing event. Market focus over the past month has naturally gravitated towards outright yield levels and away from their previous concern over flattening yield curves. This is particularly so in the domestic markets which saw both the IRS and SGS yield curves steepen P a g e

3 significantly in January through a combination of sharply lover funding costs due to improved liquidity as well as participation by the longer end of the curve in the global repricing of yields. Insofar as the adjustments of yields higher reflects investors concerns over a more challenging G3 net supply outlook as well as strength in both growth and inflation outlooks, then there could be more upside in store for yields. Financial assets will eventually have to react to this regime shift in discount factors, and we could be in for a role reversal where there is real world inflation and financial asset disinflation. Looking forward, our domestic curvature view for February aligns with being long the belly of the curve butterfly. As mentioned earlier we see the correction in domestic funding markets as having undershot, thus we are not optimistic on further curve steeping led by front end outperformance. While the longer end of domestic curves will be weighed down by 30Y SGS supply which will help to support a steeper mid to long end curve in the next month. 5Y SGS (February 2023, N518100E) auction post mortem On 29 January, SGD 2.9bio of 5Y SGS was auctioned at 1.86% cut off yield and drew a bid to cover of 1.97 times. The auction cut off was around 1 inside of where the market was implying (buyers at 1.87%) at the lunch time close; therefore a 1.86% cut off yield print was not a major surprise. Demand at this auction was roughly in line with 5Y SGS auctions from the past 2 years (2016 to 2017) which saw a range of bid to cover between 1.90 times to 2.09 times (excluding the 2017 mini auction). One positive takeaway was that SGS demand was firm enough to prevent yield slippage even though the offering size was around 10% larger than 2017 s supply of new 5Y SGS. With 5Y SGS supply out of the way, investors concerns will logically shift towards the long end of the SGS curve since the next auction will be a re-open of the 30Y SGS in February. This should help to improve the relative performance potential in the front end of the SGS curve. 5Y SGS bondswap spread which has been compressed by supply previously will have an opportunity to widen back into the teens as part of a normal mean reversion process (1Y average at 14), but headwinds remains in play, i.e. Sor dynamics, that prevents a more significant widening of 5Y SGS bondswap spreads back towards their longer term (5 year) average of 30. Considering the synchronized re-pricing of global yields that has been taking place, conditions for outright price appreciation in the new 5Y SGS appear marginal in the short term. That said relative performance potential against US Treasuries (UST) could remain constructive, despite having already put in a very credible showing year to date, as long as the prospect of Emerging Market inflows are unchallenged by a regime shift in risk asset volatilities. For a less conditional expression of relative performance, we see value in riding out the external uncertainties and delta exposure by locking in the alpha from 5Y SGS offered by its benchmark status and scarcity premium. A SGS butterfly using the new 5Y SGS benchmark against June 2021 and July 2023 is a cheap and relatively straight forward way of harvesting the alpha. In sum, our post 5Y SGS auction bias is for holding the new bond either via bondswap spreads or as butterfly position against nearby larger off the run issues to lock in the scarcity premium. Preview 30Y SGS (March 2046, NA16100H) auction Next up on the SGS supply calendar will be a re-opening of the 30Y SGS at the end of February. 30Y SGS or the long bond auctions are arguably the headline act in each year s calendar by virtue of the magnitude of duration injection that has to be carefully managed as well as the general dearth of investable options in the 30Y maturity. Between 2012 and 2017, when we exclude mini auctions, average auction size comes in at SGD 1.7bio (Max SGD 2.1bio and Min SGD 1.2bio). The average bid to cover was 1.82 times (Max 2.26 times and Min 1.57 times). Ever since the introduction of mini auctions in 2015, our framework for thinking about SGS long bond auction sizes has shifted away from a margin of safety mind set and more towards that which is akin to just in time inventory management. This change is to account for the reduced incentive for Primary Dealers to hold surplus stock due to the optionality afforded by mini auctions which reduces the cost underestimating demand. Whilst it is clear that the mini auction optionality holds true for all tenors on the SGS curve, we would argue that its value is greatest for the long end bonds due to more limited alternatives. Overall, this optionality value ought to temper 30Y SGS supply during scheduled auctions and we could see the historical average size for 30Y auctions drift lower while historical average bid to cover grinds higher over time. 3 P a g e

4 In terms of pre-auction set up, the 30Y tenor faces more limitations compared to other tenors due to liquidity issues which can have an impact on the efficiency of hedges. Thus, falling back on the principle of keeping things simple, curve steepeners have tended to be one of the more consistent performers ahead of 30Y auctions. SGD Rates Grid Short end SG IRS managed to close flat or with small gains month on month despite significantly lower Sors. Divergence between IRS and Sors became more visible in the latter half of January. For example the gap between 1Y SGD IRS and 6M Sor which had been averaging around 9 since July 2017, broke higher to close January at around 16. This repricing in the SGD IRS forwards can also be seen in the HKD and USD IRS space, but the spread change has been more abrupt in the SGD market which may have been due to hedging flows compounding the initial adjustments to a steeper Eurodollar futures curve. Steepening in the IRS forwards has marginally improved the roll down profile for receiving SGD and paying USD, which is a position that we have favoured for We continue to see deeper SGD yield discounts in an environment of gradual FED rate hikes and positive regional growth momentum, but the spread widening year to date has been significant and rather impulsive thus it warrants some caution. In terms of likely trigger for correction, we need look no further than the globally synchronized shift higher in yields which could yet cause a pullback in capital flows as investors re-evaluate regional risk premiums. SG bondswap spreads are mostly wider month on month, with the biggest change coming in the 2Y and 15Y tenors. The current bondswap spread curve still resides significantly higher than its long term averages, but we do not see enough supportive factors that will push the widening of the past month into a sustained mean reversion move. In other words, we are disinclined to chase wider bondswap spreads and believe that there will still be opportunities to fade spread tightening in the single digits. 10Y SG IRS made good gains in January and other than the RSIs bordering on overbought territory which could slow short term gains, the uptrend since the middle of the month will still be intact as long as any pull backs are contained above the 2.25%/2.30% support zone. Yield resistance lies ahead at 2.50%/2.53% and it could be a rather formidable one which has not been breached since March But 10Y SG IRS looks set to meet this resistance level with the synchronized nature of higher USTs, Bunds, Gilts and JGBs yields behind it, thus giving it the best chance in a while for a breakthrough. SGD IRS Grid 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y 30Y Spot M M M Y Y Y Y Y Y M Z-Score 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y 30Y Spot M M Y Y Y Y Data as of 29 January Y Z-Score 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y 30Y Spot M M Y Y Y Y P a g e

5 USDSGD Cross Currency Basis The SGD basis curve traded tighter over the past month led by the 7 to 10 year region. Front end curve continues to hug close to parity and whilst we cannot rule out a more significant spike into premium territory, the SGD funding outlook at the moment does not appear to be as pressured as it was back in 2014/2015 thus does not warrant a persistent premium in the SGD basis. Data on domestic loans and advances continues to grow, albeit in a non-accelerating fashion. December s print came in at +5.6% which was slightly under the 2017 average growth rate of 5.8%, but nonetheless points towards a healthy and sustained demand for credit. At the margin, this should create some support for the SGD basis as banks lengthen their funding profiles in tune with credit creation. SGD basis volatility continues to be well contained but could face greater challenges ahead since higher global yields hold the potential for greater disruptive impact. But at least for the moment market stress indicators such as Libor/OIS, High yield credit spreads and financial assets implied volatilities have not reached the point where negative feedback loops develop. USDSGD Basis 1Y 2Y 3Y 4Y 5Y 6Y 7Y 10Y 12Y 15Y 20Y 30Y Spot Spot - 1 month M Z-score M Z-score Y Z-score Data as of 28 January USDSGD Basis Curve 1Y 2Y 3Y 4Y 5Y 6Y 7Y 10Y 12Y 15Y 20Y 30Y Spot Spot - 1 month Regression Residuals USDSGD Basis against SOR vs LIBOR 1Y 2Y 3Y 4Y 5Y 6Y 7Y 10Y 12Y 15Y 20Y 30Y 10 USDSGD Basis vs EM Flow Momentum Proxy Dec-16 Jun-17 Dec-17 Flow momentum (lhs) 5Y USDSGD basis (rhs) Our EM flow momentum proxy improved markedly over the past month, which is consistent with widely reported ETF flow numbers. This inflow was been more keenly felt in the short dates which has resulted in downward pressure on USDSGD FX swaps, i.e. deepening SGD discounts. It remains to be seen how long positive risk sentiments can continue to fuel capital inflows and associated with that a deeper SGD discount. We do note that domestic liquidity management has responded in January thus future declines in USDSGD FX swaps might become less impulsive. 5 P a g e

6 SGD Billions SGD Billions 3.5 SGD Corporate Net Issuance Over The Past Year 2.5 Maturity Calendar of SGD Corporate Issuance Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Rate Views And Forecasts SORs short term outlook Headw inds from poor USD sentiments to w eigh on upside potential in SORs FX sw aps are in oversold territory and w ill benefit from consolidation. Window for SORs to reprice higher may come in the second half February ahead of an expected FED hike in March. 10Y SGS (constant maturity) short term outlook 10Y tenor w ill not be unduly impacted by 30Y supply in Feb. Auction set up could see buyers of 10Y as part of a steepener position. SGS discount to UST to consolidate. 2s10s SGS curve steepening is countertrend, post consolidation path of least resistance points low er. SORs Long Term Outlook Upw ard SOR trajectory built on 3 FED hikes in Possible tightening by MAS in 2018 to provide some buffer for SORs from higher US rates. Benign volatility environment on average reduces the potential for idiosyncratic richening of SG risk premium. 10Y SGS (constant maturity) long term outlook Gradual upw ard trajectory for 10Y underpinned by higher real yields and term premium. Progressive deepening of SGS discount to UST as FED normalization cycle plays out. Bondsw ap spread to w iden w ith improved appetite for credit, but low financial asset volatility w ill keep the upside in check. Forecasts 1Q Q Q Q M USD LIBOR M SOR M SIBOR Data as of 29 January 2018 Forecasts 1Q Q Q Q Y UST Y SGS P a g e

7 SGS Bonds Issuance Calendar Bond Announcement Date Size Announcement Date Auction Date Issuance Date Tenor New / Re-Opening Issue Code/ISIN Code Mon, 22 Jan 2018 Mon, 29 Jan 2018 Thu, 01 Feb yr New N518100E/ SG31B Mon, 19 Feb 2018 Mon, 26 Feb 2018 Thu, 01 Mar yr Reopen NA16100H/ SG31A Thu, 01 Mar 2018 Tue, 20 Mar 2018 Tue, 27 Mar 2018 Mon, 02 Apr 2018 TBA Reopen TBA Tue, 20 Mar 2018 Tue, 27 Mar 2018 Mon, 02 Apr yr Reopen N515100S/ SG31A Thu, 19 Apr 2018 Thu, 26 Apr 2018 Wed, 02 May yr New NX18100A/ SG31B Mon, 21 May 2018 Mon, 28 May 2018 Fri, 01 Jun yr Reopen NX13100H/ SG Wed, 20 Jun 2018 Wed, 27 Jun 2018 Mon, 02 Jul yr Reopen NZ16100X/ SG31A Fri, 20 Jul 2018 Fri, 27 Jul 2018 Wed, 01 Aug yr Reopen NX16100F/ SG31A Tue, 21 Aug 2018 Wed, 29 Aug 2018 Mon, 03 Sep yr Reopen NY05100N/ SG Wed, 19 Sep 2018 Wed, 26 Sep 2018 Mon, 01 Oct yr Reopen NZ13100V/ SG Mon, 01 Oct 2018 Mon, 22 Oct 2018 Mon, 29 Oct 2018 Thu, 01 Nov 2018 TBA Reopen TBA Source: MAS 7 P a g e

8 Appendix SIBOR SIBOR: Monthly Change 1M 3M 6M 12M % M SIBOR - 12 months to 29 Jan M SIBOR -1SD AVE +1SD SOR 6 SOR: Monthly Change M SOR - 12 months to 29 Jan Overnight 1M 3M 6M 0.90 % M SOR -1SD AVE +1SD BILLS Indicator Date 3M 6M 12M 29 Jan Bills 29 Dec Bills: Monthly Change 3M 6M 12M M Bills - 12 months to 29 Jan % M Bills -1SD AVE +1SD 8 P a g e

9 SGS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 29 Jan SGS 29 Dec SGS: Monthly Change 2Y 5Y 10Y 15Y 20Y 30Y 2Yx10Y SGS - 12 months to 29 Jan % Yx10Y SGS -1SD AVE +1SD IRS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 29 Jan IRS 29 Dec IRS: Monthly Change 2Y 5Y 10Y 15Y 20Y 30Y 2Yx10Y IRS - 12 months to 29 Jan % Yx10Y IRS -1SD AVE +1SD 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

Market Summary Over the past week, 3M SOR increased by 9.9bps, 3M SIBOR increased by 0.6bps and 3M LIBOR increased by 3.1bps.

Market Summary Over the past week, 3M SOR increased by 9.9bps, 3M SIBOR increased by 0.6bps and 3M LIBOR increased by 3.1bps. Victor Yong Victor.YongTC@UOBgroup.com Heng Koon How Heng.KoonHow@UOBgroup.com Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Monday, 12 February