Global Economics & Markets Research Company Reg No. 193500026Z Victor Yong Victor.YongTC@uobgroup.com Quek Ser Leang Quek.SerLeang@uobgroup.com Wednesday, 07 October 2015 Singapore Rates Monthly SIBORs & SORs SORs have been bookended this past month by profit taking objectives on one side and increasingly consensus expectations for MAS to ease policy in October on the other. Yields have eased back to 1 month lows after the FED failed to deliver on their first hike in September and subsequent upside impetus for SORs has been lacking due to further downgrades in FED interest rate expectations post FOMC (via reduced depreciation pressure on SGD currency). Our economics team has pencilled in a one off shift lower in the SGD NEER mid point which is middle of the road when viewed in terms of signalling implications from policy action. The more aggressive option (not including a combo deal) within the MAS toolkit would be a move to flatten the slope down to neutral since this change would have a more persistent impact compared to a one off mid point shift. The band widening option is the least likely to be employed given that market expectations have been fairly consistent and they have yet to demonstrate what can be construed as dysfunction. Expectations for MAS easing is largely reflected in prices thus we expect the post event price discovery in SORs to settle at a lower range but likely still above 1. We should also see volatility diminish when a new equilibrium is found since there will still be a 2 month window till the December FOMC for investors to calibrate their SGD currency expectations. SORs Short Term Outlook (1 month) MAS event risk clouds short term outlook. Price discovery post event should eventually find equilibrium at above 1. SORs Long Term Outlook (1 year) FED normalization will ultimately drive SORs higher through the currency impact (diminishing with time) and higher LIBORs. Forecasts 4Q 2015 1Q 2016 2Q 2016 3Q 2016 3M SOR 1.25 1.30 1.35 1.45 3M SIBOR 1.15 1.22 1.27 1.37
Wednesday, 07 October 2015 Page 2 Technical Insights SGD 3M SOR: 1.23 Weakness could extend lower but a sustained move below 1.13/1.18 is not expected. The down-move from the high of 1.56 in early September is viewed as a corrective pull-back and not the start of a sustained down-move. While the 3M SOR is currently sitting just above strong support level (middle of the Envelope), the weakness appears incomplete and is expected to extend lower in the coming month. However, any further down-move will likely struggle to move below the solid support zone near 1.13/1.18. This is a strong support level as it represents a cluster of technical supports (previous peaks, bottom of fallingchannel as well as 50 retracement of the 0.72-1.56 up-move) and our base view is that this level will hold in the coming month. On the upside, 1.35 is a strong resistance and a move above this level would be a good indication that the down-move has stabilized.
Wednesday, 07 October 2015 Page 3 Singapore Government Securities (SGS) and Interest Rate Swaps (IRS) Yields were dramatically lower over the past month led by demand revival in SGS. The aggressive bond rally drove 10Y SGS yield lower by almost 50bps and dragged 10Y IRS down by around 20bps, resulting in a sharp expansion of the longer tenor bondswap spread curve. Curvature changes diverged with 2s10s bull flatter in SGS but bull steeper in IRS. We can trace the beginnings of the bond rally back to the middle of September and the FOMC's decision not to hike rates. This caused the initial downdraft in yields which was compounded by weak US non-farm payrolls on 02 October. The reversal of fortune in SGS has also outperformed the rally in UST. Cross market spreads have collapsed with the 10Y SG vs. US premium dropping from 70bps before September's FOMC to 30bps by 05 October. Side lined investors quickly caught onto signs of a vacillating FED which made the SG premiums look rich, the subsequent buying easily triggered a waterfall effect as primary dealers' inventory levels would have been fairly low heading into September's FOMC event risk. For the rest of the month, we expect yield direction to be sensitive to shifting expectations surrounding Central Bank policies. October's MAS will be an obvious catalyst, but below the surface we will also be watching out for signs of investors shifting the narrative back onto developed market weakness especially with recent data disappointments on both sides of the Atlantic as well as the absence of fresh shocks in emerging markets. With developed market weakness in the spotlight, the resultant re-pricing for further QE could even stretch to incorporate a volte face by the FED and this would be a very conducive environment for SGS to outperform, at least until the negative feedback loop returns to emerging markets. Our base case view sees MAS re-centring the SGD NEER midpoint lower and the FED to hike 25bps in December. Therefore, we expect yields to be biased higher on a cyclical basis but SGS and IRS may be range bound in the short term due to event risk as well as from a less adverse environment for currency expectations. 10Y SGS Short Term Outlook (1 month) Range bound likely. SGS demand will be sensitive to MAS event risk as well as the 2016 supply calendar (due out in October). 10Y SGS Long Term Outlook (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 2015 1Q 2016 2Q 2016 3Q 2016 10Y SGS 2.70 2.80 2.90 3.00
Wednesday, 07 October 2015 Page 4 Technical Insights SGD 5Y IRS: 2.23 Weakness could extend lower but likely at a slower pace and less impulsive. While the down-move from the high of 2.72 in early September is viewed as a corrective pull-back, the ease of which the major support at 2.28 was taken out suggests further downward pressure in the coming month. That said, with shorter term indicators quickly approaching oversold, any further down-move will likely be at a slower pace and less impulsive. The next support is near 2.18/2.21 and we expect this zone to at least thwart the current down-move temporarily. The next level at 2.13 is a rather major support and at this stage, a break below this level is not expected. On the upside, only a move back above the top of the falling channel near 2.38 would indicate that the downward pressure has eased.
Wednesday, 07 October 2015 Page 5 Singapore Savings Bonds (SSBs) The next SSB will be issued with a 10 year yield of 2.78. Issue size has been kept unchanged at SGD 1.2bio and the closing date for application is 27th October. The inaugural SSB auction (results announced on 28 September) garnered only SGD 418mio of bids, but this would not have been a major surprise given that the "free look" option up until subscription closing date would have informed savers that the next issuance would most likely offer higher yields across the curve. Therefore, the low take up rate may be indication that savers view SSBs as an opportunistic yield enhancement (over short term fixed deposits) vehicle rather than from a portfolio allocation framework. By keeping the offer size unchanged for this month's issuance, MAS has signalled their intent to make the SSB facility predictable and widely available. Should SGS yields continue to range at prevailing levels (October month to date at 2.46), November's 2.78 yield (announced 01 October) may prove to be a difficult hurdle to surpass. Therefore, we would expect interest to pick up noticeably for this month's SSB issuance. An unchanged retail demand despite comparatively attractive yield level would suggest that more work was required to enhance the public profile as well as widening the variety of access points for SSBs. The flattening of the SGS yield curve over September's month/quarter end has significantly reduced the yield averages for maturities beyond 5 years. However, yields in the shorter tenors have increased due to the shift in the market's consensus towards greater probability of MAS easing monetary policy in October. Current averages (if maintained) for 1 to 2 years of around 1.30 will pick up 12bps over the current SSBs as well as being competitive to fixed deposit substitutes offering around 1.50. Therefore, savers with shorter time horizons may still be attracted to December's SSBs despite lower 10 year yield since they have the option to put at par. For further detail and FAQ regarding the Singapore Savings Bonds (SSBs) please refer to website link: www.sgs.gov.sg/savingsbonds Average Yield Average Yield Month to Date (Oct) 1Y 2Y 5Y 10Y 1.323 1.275 1.877 2.442 September 2015 1.198 1.186 2.194 2.778 August 2015 0.969 1.018 2.029 2.622 2.90 2.80 2.70 2.60 2.50 01 Sep 08 Sep 15 Sep 22 Sep 29 Sep
bps bps bps Singapore Rates Monthly Wednesday, 07 October 2015 Page 6 Appendix SIBOR Indicator Date Overnight 1M 3M 6M 12M 06 Oct 2015 1.01366 1.13483 1.19008 1.31434 SIBOR 03 Sep 2015 0.94912 1.07058 1.12958 1.25000 6.5 6.4 6.3 6.2 6.1 6.0 5.9 5.8 1M 3M 6M 12M 1.20 1.00 0.80 0.60 0.40 0.20 0 3M SIBOR -1SD AVE +1SD SOR Indicator Date Overnight 1M 3M 6M 12M 06 Oct 2015 0.39679 1.14845 1.23507 1.37431 SOR 03 Sep 2015 0.20681 1.41642 1.50670 1.60425 2 1-1 -2-3 Overnight 1M 3M 6M 2.00 1.50 1.00 0.50 0 3M SOR -1SD AVE +1SD BILLS Indicator Date Overnight 1M 3M 6M 12M 06 Oct 2015 1.18200 1.29700 1.29000 Bills 03 Sep 2015 0.94100 1.00500 0.99600 3 25.0 2 15.0 1 5.0 3M 6M 12M 1.50 1.00 0.50 0 3M Bills -1SD AVE +1SD
bps bps Singapore Rates Monthly Wednesday, 07 October 2015 Page 7 SGS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 06 Oct 2015 1.202 1.803 2.373 2.703 2.704 2.694 SGS 03 Sep 2015 1.045 2.122 2.791 3.045 3.119 3.088 2 1-1 -2-3 -4-5 2Y 5Y 10Y 15Y 20Y 30Y 2.30 1.80 1.30 0.80 2Yx10Y SGS -1SD AVE +1SD IRS Indicator Date 2Y 5Y 10Y 15Y 20Y 30Y 06 Oct 2015 1.710 2.293 2.828 2.993 3.038 3.108 IRS 03 Sep 2015 1.965 2.595 3.062 3.220 3.257 3.327-1 -2-3 -4 2Y 5Y 10Y 15Y 20Y 30Y 2.30 1.80 1.30 0.80 2Yx10Y 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.