Singapore Rates Monthly

Transcription

1 Global Economics & Markets Research Company Reg No Z Victor Yong Tuesday, 15 September 2015 SIBORs & SORs Short term interest rates have continued their ascend this month with both SIBORs and SORs making new year to date highs. The reinvigorated trend higher in yields, which began back in July, was initially catalysed by investors shifting their attention towards a possible September FED rate hike but has since morphed into Emerging markets fears. Both factors have exerted the same upward pull on domestic short term yields via the interest rate and currency expectations components. Event risk looms large with FOMC on 17th September followed by MAS in mid October. Evaluating the permutations of outcome from event risks and their possible impact on rate and currency expectations requires some mental dexterity, thus it is not surprising that volatility has remained elevated. This year has also proved to be a watershed in terms of policy making surprises, therefore relying on market implied probabilities of policy change may be a case of the tail wagging the dog. We cannot rule out the possibility of further sharp moves higher in SORs and SIBORs, given the known FED policy stance as well as persistent EM worries. Instead, the environment would suggest that SORs and SIBORs may have yet to record an overshot top despite levels hitting 7 year highs. We are cognizant that the above description of the upcoming landscape makes our forecasts of SIBOR (3M year end at 1.15) and SOR (3M year end at 1.25) seem optimistic from the point of view of market normalization, particularly since prevailing (14th September) 3M SIBOR is at 1.13 and 3M SOR is at It should be clear that the risk to our forecast is to the upside, though we will defer changes till after the event risks. SORs Short Term (1 month) Episodes of SOR corrections (lower) likely to be mild. EM fragility unlikely to be resolved in the short term thus will continue to dampen investors' interest in local currency exposures. SORs Long Term (1 year) FED normalization will ultimately drive SORs higher through the currency impact (diminishing with time) and higher LIBORs. Forecasts 4Q Q Q Q M SOR M SIBOR

2 Tuesday, 15 September 2015 Page 2 SIBOR 14 Sep SIBOR 11 Aug M 3M 6M 12M M SIBOR -1SD AVE +1SD SOR 14 Sep SOR 11 Aug Overnight 1M 3M 6M M SOR -1SD AVE +1SD BILLS 14 Sep Bills 11 Aug M 6M 12M M Bills -1SD AVE +1SD

3 Tuesday, 15 September 2015 Page 3 Singapore Government Securities (SGS) and Interest Rate Swaps (IRS) Domestic yield levels have shifted significantly higher over the past month due to ongoing emerging market fragility and the associated fear of capital outflows. In addition, 15Y SGS supply at the end of August also added to the upside yield pressure. The auction yield cut off was 3.05 and the bid to cover came at 1.65 times, overall result was within expectations and served to confirm that SGS demand was below average despite the high yield on offer. Yield curve changes this month diverged; the IRS curve moved flatter whilst the belly of the SGS curve cheapened against the wings. Higher SORs have caused larger magnitude yield shifts in 2 to 5 year IRS compared to their SGS equivalents and resulted in wider bondswap spreads as well as bearishly flattening the IRS curve. The 2s10s IRS curve has been rebuffed by resistance at 105 for the past month, but the key remains with the psychologically important 100 level which when breached could cause the curve flattening move to accelerate. The cheapening of the SGS curve belly has been a consequence of below average demand. Investors have been side lined due to a lacklustre economic growth story as well as from fears of contagion should China and regional fragility deteriorate. The overhang from August's 15 year supply has caused the back end curve inversion to spread from the 20s30s down to the 15s30s. Whilst inversion in the latter is not as common as the former, the prevailing environment does not suggest to us that major steepening risk is likely in the short term. We expect the SGS curve beyond 10 years to remain relatively flat until either the local currency outlook improved or if a new 30Y SGS debuts in next year's auction calendar. 10Y SGS Short Term (1 month) SGS demand to remain below average due to subdued risk appetite amidst ongoing EM fragility as well as Central Banks event risks. Opportunities for correction lower in yields will hinge on outcome from event risks. 10Y SGS Long Term (1 year) Expect the fallout from FED normalization to be contained and for the currency expectations to revert to a more balanced stance. Correlation to US should guide yields higher albeit at a more gradual pace. Forecasts 4Q Q Q Q Y SGS

4 Tuesday, 15 September 2015 Page 4 SGS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 14 Sep SGS 11 Aug Y 5Y 10Y 15Y 20Y 30Y 2Yx10Y SGS -1SD AVE +1SD IRS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 14 Sep IRS 11 Aug Y 5Y 10Y 15Y 20Y 30Y Yx10Y IRS -1SD AVE +1SD

5 Tuesday, 15 September 2015 Page 5 Singapore Savings Bonds (SSBs) We're now mid-month into the subscription window for the first SSB (October 2.63 YTM). It is difficult to gauge the actual level of retail interest other than from early reports that FAQ hotlines were well utilized. Rising SIBORs may have received a boost by SSB subscription lock up, but this would have been at best a secondary factor and the pace of stepwise SIBOR adjustments have yet to demonstrate a change in pace that would indicate a greater strain on liquidity. Month to date averages for the next SSB (November) are higher than the previous month and the yield curve is also steeper which will also result in a more attractive coupon profile that may encourage savers to hold to maturity compared to the current issuance. The November SSB average 10 year is at 2.84 and the 1 year yield has also pushed above the 1 level (at 1.07), thus making it more attractive for savers with shorter time horizons as well. SGS yields will have to fall significantly in the second half of September in order flip the average yields back under the current October SSB's, this is unlikely to occur in the current environment of subdued SGS demand. In sum, retail interest in October SSB could yet pick up now that the election is out of the way but with the month to date average yield for November SSB presently 20 higher than the current issuance, there may be a segment of opportunistic savers that could be tempted to re-weight their "dollar cost averaging" plan or defer their SSB entry until next month. For further detail and FAQ regarding the Singapore Savings Bonds (SSBs) please refer to website link: Average Yield Month to Date (Sep) Average Yield 1Y 2Y 5Y 10Y August July Aug 10 Aug 17 Aug 24 Aug 31 Aug 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.