Victor Yong Victor.YongTC@UOBgroup.com Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Monday, Swirl of competing headlines clouds visibility Rates Insights Market Summary Over the past week, 3M SOR increased by 12.3bps, 3M SIBOR increased by 8.4bps and 3M LIBOR increased by 2.7bps. The 1M vs. 6M SOR curve flattened by -13bps and the 3M SOR discount to SIBOR lessened by 3.9bps. 1Y has outperformed vs. UST and outperformed vs. SG IRS. The 1Y SG IRS yield increased by 1.9bps, which was less than 1 std dev based on historical yield changes over the past month. The 5Y vs. 3Y SG IRS curve closed today at.75 and has flattened by -3.4bps over the past week..12.8.4 1 Week Benchmark Yield Changes UST SG IRS Weekly Yield Change Relative To 1 and 2 Standard Deviation Bands.2.1.. IRS -.1 -.4 2Y 5Y 1Y 3Y -.2 2Y 5Y 1Y 15Y 3Y 1Y SG IRS 2s1s SG and US IRS Curves 2.45.82.44 6-Nov 13-Nov 2-Nov 27-Nov 2.4 2.35 2.3 2.3 2.25 2.2 4-Dec.8.78.76 SG (lhs) US (rhs) 27-Nov 28-Nov 29-Nov 3-Nov 1-Dec.8.41 4-Dec.42.4.38.36 4 December217
17-Nov 2-Nov 21-Nov 22-Nov 23-Nov 24-Nov 27-Nov 28-Nov 29-Nov 3-Nov bps 2 P a g e Money Market Rates Historical Volatility Annualized () 3D 9D 18D Historical Volatility Annualized () 3D 9D 18D 1M SOR 7. 83.9 93.9 3M SOR 44.8 56.9 67.1 6M SOR 28.2 38.9 42.9 1M SIBOR 17.2 1. 21.2 3M SIBOR 14.9 8.6 12.5 6M SIBOR 5.3 3.1 2.2 Domestic yields diverge SG money market rates shifted higher over the past week with Sibors, Sors and MAS bills all repricing. The trigger for repricing can largely be traced to tighter domestic liquidity as overnight SGD interbank deposit rates moved above 1 intraday and the overnight USDSGD FX swap flipped back into premium territory. Further evidence for the conservation of liquidity can be seen from last week's MAS bills auctions which saw the 4W, 12W and 6M tenors all cutting at/above 1.5 for the first time since 28. Tighter domestic liquidity at this point in time is not surprising given seasonal patterns, in addition domestic repricing has also been consistent with the price trends observed in other markets such as US Libors and Hibors. SG yields in the near term will likely remain supportive into December's widely expected FED rate hike. But for the moment, fears of a risk premium shock scenario that could cause domestic rates to significantly diverge from US rates appear premature based on benign currency expectations as well as the FED's twin tightening helping to underpin USD funding demand. Short term view: * 3M SORs looking to carve out an equilibrium around 1.. Consolidation at higher equilibrium is expected unless domestic currency strength finds new positive catalysts. * US Libors to continue their grind higher with 1 more hike in 217 expected (December). Upside risk could come via unintended USD funding stress as a result of FED's Balance Sheet reduction program. Daily changes in 3M SOR Attributed 1. UOB SGD NEER Deviation From Mid Point 5.. FX Swap Libor.1.5 1M USDSGD risk reversal SGD NEER deviation (rhs).97 1.5 1.3 1.1.9-5. SOR..7
bps 3 P a g e Bonds and Interest Rate Swaps Benchmark Tenor Current T - 1 T - 2 T - 3 T - 4 T - 5 SIGB 1 5/8 1/1/19 2Y 2. 2.2 1.8 1.7 1.8 -.8 SIGB 1 3/4 4/1/22 5Y -11.9-9.4-8.9-8. -7.1-7.8 SIGB 3 1/2 3/1/27 1Y -13. -1.8-11. -9.9-8.7-1.6 SIGB 3 3/8 9/1/33 15Y -8.4-7.2-6.8-6. -4.7-7.5 SIGB 2 1/4 8/1/36 2Y -15.6-13.7-12.8-12.3-12.8-15.2 SIGB 2 3/4 3/1/46 3Y -7.5-8.7-8.9-8.7-8.3-1.1 1Y UST headline noise to dominate This week should see the fate 1Y UST being decided by 2 duelling sets of headlines. Exerting a positive pull on one side will be from signs of traction in the tax reform reconciliation process while on the other side dragging down risk sentiments will be any further spike in political uncertainty due stemming from the Mueller inquiry. Based on Friday's test case and comparing the Asian hours opening prices for 1Y UST, it would seem that the news flows have cancelled each other out. However, the more important takeaway based on intraday price swings in 1Y UST points to noisy markets in the short term and persistence in recent ranges as breakout attempts get faded by opposing camps. yield curve belly outperformed Conditions have aligned to keep the 2s1s3s butterfly under pressure. At the front, domestic interbank rates have begun to converge higher towards MAS bills rates which will reduce the payoff from carrying shorter dated. At the back, primary dealers will be keen to avoid over weighted positions going into 218 due to a heavier supply calendar as well as from this year's experience of rather lukewarm demand for duration. The latter can be inferred from contrasting performances in the 1s3s vs. UST curves, which has the SG curve lagging UST's decline, and the 3Y SG bondswap spread which has struggled to widen meaningfully all year. Both factors on the wings look set to persist into the new year which will keep the 2s1s3s fly bias tilted towards selling noise induced spikes higher. Short term view: * 1Y UST 1 week expected range 2.3/2.45. * 1Y 1 week expected range 2.4/2.19. 3. 2.6 2.2 1.8 1.4 1. Bond Yield Curves as at 4 Dec 217 2.79 2.4 2.15 1.8 2.56 2.11 1.69 1.47 2Y 5Y 1Y 3Y 3 2 1-1 UST -2 Asset Swap Spread Curve ASW (-1week) ASW (current) The Next Auction Next Auction: 5Y New Issue Auction: February 223 (N5181E) Size Announcement Date: Auction Date: Monday, 29 January, 218 Auction Size: T.B.A. Monday, 22 January, 218
4 P a g e Historical 5Y auctions between 21 to 217 * Average auction size = SGD 2.3bio (Max SGD 3.1bio, Min SGD 1.6bio) * Average B/C = 1.81 times (Max 2.9 times, Min 1.42 times) New 5Y issuance sizes have ranged between SGD 2.2bio to 3.1bio, with a weighted average bid to cover of 1.78 times. Pricing behaviour has historically seen supply overhang weighing down on bond prices between 2 to 1 trading days before auction. The average cumulative yield gain between 21 to 217 peaks out at close to 5bps before declining closer to auction day. Of the 1 auctions that have taken place between 21 and 217, there was only 2 instances where the 2 day cumulative yield change was positive on the day before auction. Demand trend has been relatively stable since 216 with bid to cover comfortably above the weighted average of 1.81 times. The market for 5 year duration has recovered from the uncertain years between 213 and 215 where interest rate volatility was elevated due to Taper Tantrum and Soaring SORs. 5 Year Auction History (21 to Date) 3,5 2,5 1,5 5 2.5 2. 1.5 1. Auction Amount (lhs) Bid-to-Cover Ratio (rhs) Pre Auction Average Yield Change (21 to Date) 4 Total Yield Change From 2 Trading Days Before Auction -19-16 -13-1 -7-4 -1 2-2 -4 bps 4448 463 4963 41358 41666 4197 4218 42395 4264 42822 4334 4 2-2 bps Auction Dashboard WI Feb 223 closing yield (): 1.77 WI Feb 223 Bondswap spread 11.8 WI Feb 223 vs 5Y UST -37.8 2s5s1s CM Fly -11. Weekly Change -2.4 Weekly Change 8.4 Weekly Change -.3 Weekly Change -2.
SGD Millions 5 P a g e Directional bias * The short term view for 5Y is neutral. Yield resistance at the 1.8 round number line has been effective in frustrating bears in November. * Yield uptrend from mid September 217 is intact. Trend continuation should see the 5Y constant maturity ending 217 between 1.8 and 1.9, but a break down of trend line will argue for a return to the 1.6 to 1.7 range. Spread bias * Bondswap spread continue to fade contractions into the single digits. Spread inversion is an outlier risk. * discount to UST, neutral short term. Tactical reduction of short USTs into December FOMC event as bonds have shown a tendency for post event relief rallies. Notes on 217 Cash Flows * March/September are chunky coupon months for with SGD 737mio to be distributed. * May/November are dry months for coupons. * Maturities for 218 total SGD 13.5bio (vs. SGD 1bio in 217) due in April (SGD 6.7bio) matured and September (SGD 6.8bio). Coupons for 218 Maturity for 218 8 6 4 2 SGD Billions 8. 6. 4. 2.. December November October September August July June May April March February January December November October September August July June May April March February January
6 P a g e Rates Biases Inception Date Currency Type Format Entry Stop Target Rationale at inception 28-Aug-17 SGD Bondswap 3-Jan-17 SGD outperform Long October 219 vs. pay 2Y SGD IRS short 1Y UST vs long 1Y -3bps -1.5bps - 13bps - 2bps 2bps 3bps 3-Jan-17 SGD Steepener 5s1s SG IRS 48.5bps 4bps 7bps Risk for 2Y SG bond swap spreads are asymmetric. This spread has only been tighter on 8 previous occasions since 2. SORs have started to show signs of being responsive to tighter SGD liquidity. Arguments for higher yields into 217 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 217. Therefore we expect to see 1Y UST spread moving further into positive territory over the course of 217. Trumpflation is expected to have negative implications on US deficit, which will drive a greater appreciation of duration risk and richer term premiums. For 217 we expect to see the term premium repriced to a higher equilibrium level. From a SG rates market perspective, a steeper 5s1s IRS curve will be justified in the above scenario at least until the FED demonstrates a significantly more hawkish stance.
7 P a g e Benchmark Levels Country Rates Current 1 week change 1 month change 1 year change 3M Libor () 1.49.3.11.55 2Y Bond () 1.8.6.18.7 USD 1Y Bond () 2.4.7.6.1 1Y IRS () 2.38.8.11.16 2s1s Bond curve (bp) 59.7 1. -12.1-69. 3M SOR () -.12.1.39 2Y IRS () 1.5.3.7 -.1 SGD 1Y IRS () 2.3.2 -.3 -.43 1Y Bond () 2.11 -.1 -.3 -.41 2s1s IRS curve (bp) 79.6 -.9-9. -33.2 3M Klibor () 3.43...2 2Y IRS () 3.71.1.11.8 MYR 1Y IRS () 4.6.2.3 -.1 1Y Bond () 3.87 -.8 -.14 -.49 2s1s IRS curve (bp) 35..8-7.5-18. 3M Bibor () 1.57.. -.2 2Y IRS () 1.51 -.1.4 -.13 THB 1Y IRS () 2.38 -.6.8 -.17 1Y Bond () 2.37 -.2.7 -.34 2s1s IRS curve (bp) 86.5-5. 4. -4. 3M Jibor () 5.25.4.7-1.78 IDR 2Y Bond () 5.58 -.17 -.52-1.26 1Y Bond () 6.5 -.6 -.11-1.51 2s1s Bond curve (bp) 92.6 11.6 41.8-25.3 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. 193526Z