Heatmap of Daily Changes. - Singapore Malaysia Thailand Indonesia China. Equity (%) -0.7% -0.4% -0.3% 0.2% 0.1% -0.6%

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1 Victor Yong Global Economics & Markets Research URL: Rates Insights SG Rates U-turn After Auction Surprise Tail. Friday, Heatmap of s - Singapore Malaysia Thailand Indonesia China HKD Hong Kong CNH Equity (%) -0.7% -0.4% -0.3% 0.2% 0.1% -0.6% USD_Asia FX (%) -0.1% -0.1% 0.0% -0.2% 0.1% 0.0% -0.2% 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 -1.7, -5 and -4.5 in the 1M, 3M and 6M tenors respectively tonight based on the closing swap levels. UST yield was unchanged at 0 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 -1.4 and SG curvature performance today saw the 2s10s steeper by 0.6 in IRS and flatter by -0.9 in. Regional yields today rose in China, fell in Malaysia, Thailand, Indonesia, Hong Kong, and in terms of magnitude of change the largest positive yield change in the tenor was 1 recorded by CNY IRS while the day's biggest yield drop was -4 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 % -0.01% -0.21% -0.64%

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 2.75 IRS -1SD Ave +1SD Jan 29-Jan 31-Jan 2-Feb 4-Feb 6-Feb 8-Feb 10-Feb 12-Feb 14-Feb 16-Feb 18-Feb 20-Feb 22-Feb 24-Feb SG vs US (IRS semis) cross market spreads 0.0 IRS Feb Feb Y 5Y 15Y 20Y 30Y -20 1Y 2Y 3Y 5Y 7Y 15Y 20Y 30Y SORs NEER touched its strongest levels since September 2016 and the basket currently sits around +0.7% above the mid point. Prospect for a sharp reversal back under the mid point in the near term does not appear very optimistic when we take into account yesterday's domestic CPI trend, expansionary budget 2017 and diminished momentum in the strong USD narrative. It is likely that the NEER would continue to hover above the mid point. Further strong gains by NEER will face increasing headwinds since April's MAS meeting is only around one a half month away, we doubt very much that the market/analysts are prepared to position/call for MAS to validate a stronger NEER basket via a higher mid point recentring. Sticky NEER will help to cap the upside on SORs while the downside yield limits looks to be mostly exhausted at around 0.65% to 0.70% for 3M SOR. A test of the lows in September 2016 (3M SOR at 0.48%) is at best an outlier possibility given that positioning for weaker is a lot lower currently, this will help to minimise the SOR undershooting impact of position unwinds. Short term view: USD directional bias needs to be stronger to induce better SOR volatility when technical levels break in the USD spot FX. 1Q 2017 expected 3M SOR range: 0.70% to 0.90%. and IRS Lower SG yields over the past week has largely been a combination of a waning reflation narrative and the ascendency of European political fears. The latter can be seen from the sharp widening in French vs. German sovereign yield spreads. Short term focus will be on the Bunds after its yield managed to breach important technical levels overnight. A downside extension move by Bund yields will increase the risk of UST breaking yield support at 2.28%/2.30%. In a scenario of dual yield support breaking, SG IRS will probably be repriced into a lower range of 2.35%/2.55%. We've probably not seen the worst of the reflation unwinding pain trade, but calling the straw that breaks the camel's back is tricky. That said, knowing this doesn't do much to sooth rattled nerves as investors focus on the potent mixture of risk aversion and stretched positions/valuations which can often lead to abrupt undershooting in yields. This might well be the "big one" but it pays to remember there have also been episodes in the recent past (e.g. Trump and Brexit) which show that the "obvious" pain

3 3 P a g e trade can also have a short half life. In a nutshell, stay agnostic, give technical breaks the benefit of doubt and go with momentum. Short term view: SG IRS consolidation range between 2.55%/2.75%. Upside impulse has waned, but a downside break may require the assistance of a collapse in USD and/or Equities to elevate risk aversion. auction and its surroundings Next Auction: New 5Y 01 April 2022 (N517100F) Announcement date: Wednesday, 22 March, 2017 Size: T.B.A. Auction date: Wednesday, 29 March, 2017 March 2027 () auction results There was certainly volatility to spare in today's SG rates market. Today's supply and steeper 10s30s UST curve overnight did not deter buyers from the longer maturity in the morning session. Yields fell led by renewed short covering in the 20Y thereby resulting in a flatter curve. Long end outperformance also caused the 30Y vs. UST spread to touch their widest levels in the past year. Then came the auction result, March 2027 cut off at 2.35% with bid to cover at 1.55 times (smallest covered auction since 2008's 1.35 times). At 2.35% cut off, the March 2027 tailed from its lunch time closing yield by around 8 as a result of the smaller demand. This resulted in a rather interesting afternoon session in, namely how to resolve the auction tail with risk off sentiments. It was no surprise to see yields back away from their morning lows but there was some reluctance by primary dealers to offset greater than expected duration since the long bonds were still better bid. This meant that 10s30s flattening in the morning session survived to close at 13.5 (flattest curve since 30Y Mar 2046 was issued) lower by 1.5 despite outright yield levels closing off their lows. But offside positioning makes us wary of fading the historically flat 10s30s in the short term. We would wait for recently reinvigorated short covering in the long end of the curve to diminish before taking a look at 10s30s steepeners. As previously mentioned we've closed our tactical trade at the auction; March 2027 (initiated on 7 Feb) short at 2.30%, covered at 2.35%. UST (overlaid on 17 Feb) long at 2.41%, covered at 2.38%. Post auction view: March 2027 will likely continue to display underperformance tendencies vs neighbouring bonds after the auction since it is the obvious pain point to push (especially after the large 8 March 2027 tail) when bond sentiments subsequently turn negative. Therefore, we prefer to spread duration exposures across both benchmark and off the runs. Next Auction - 5Y new issue Next month's auction looks to be a more straight forward affair simply because of 7.5bio of maturing proceeds. A quick take on the 2s5s10s constant maturity butterfly does show that the belly is currently rather rich versus the wings but with the maturity proceeds in play, we are not too optimistic on significant 5Y auction related cheapening. March 2027 yield (%): March 2027 vs (old) spread (): 10.5 March 2027 vs UST spread (): -5.0 March 2027 vs SG IRS spread (): 28.0 (): -0.5 (): -1.0 (): 3.0 (): -0.5 Key notes on 2017 cash flows * March/September are chunky coupon months for with 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 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 Friday, 20 Wednesday, 18 January, 2017 Widener outperform Long 5Y Bmk vs. Short 20Y Bmk Pay 2F2Y IRS vs. receive 5Y IRS short UST vs long 5s10s SG IRS 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 -4. Buying into pre US President inauguration dip. Expect IRS forwards to outpace spot IRS yield gains when reflationary momentum return. 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 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.

5 5 P a g e 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 Rates Benchmarks - SG Session Change () Country Benchmark Open High Low Close 1D 1M 1Y IRS US UST s10s UST IRS SG s10s IRS IRS MY MGS s10s IRS IRS TH THB Bond s10s IRS ID IDR Bond s10s Bond IRS - 7D repos CH CNY Bond s10s IRS IRS HK 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