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 218 Expect Volatility to Linger Over Holiday Shortened Week Rates Insights Market Summary Over the past week, 3M SOR increased by 9.9, 3M SIBOR increased by.6 and 3M LIBOR increased by 3.1. The 1M vs. 6M SOR curve flattened by -19.7 and the 3M SOR discount to SIBOR lessened by 9.3. 1Y SGS has outperformed vs. UST and outperformed vs. SG IRS. The 1Y SG IRS yield increased by 4.5, 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.79 and has steepened by 1.5 over the past week..16.12.8.4. -.4 -.8 1 Week Benchmark Yield Changes 2Y 5Y 1Y 3Y UST SGS IRS SG IRS Weekly Yield Change Relative To 1 and 2 Standard Deviation Bands.3.1. -.1 - -.3 2Y 5Y 1Y 15Y 3Y 1Y SG IRS 2.57 2.6.9 2s1s SG and US IRS Curves.52.54 15-Jan 22-Jan 29-Jan 5-Feb 2.5 2.4 2.3 2.2 2.1 12-Feb.88.86.84.82.8.78.89 SG (lhs) 5-Feb 6-Feb 7-Feb 8-Feb 9-Feb 12-Feb.5.46.42.38.34.3
26-Jan 29-Jan 3-Jan 31-Jan 1-Feb 2-Feb 5-Feb 6-Feb 7-Feb 8-Feb 2 P a g e Money Market Rates Historical Volatility Annualized () 3D 9D 18D Historical Volatility Annualized () 3D 9D 18D 1M SOR 135.2 11.5 17.3 3M SOR 7.9 54.1 69.2 6M SOR 45.9 34.6 44.1 1M SIBOR 3.1 32.4 29.3 3M SIBOR 29.8 34.5 25.9 6M SIBOR 19.2 29.4 2.7 SGD NEER oscillating around mid-point Our SGD NEER estimate dipped to its lowest level in a year, relative to the mid-point, last week. Weakness in the SGD basket for 218 has taken place over 2 waves; the initial drop from +1.4 to +.8 between 5th to 12th January, followed by brief consolidation before renewed weakness towards the mid-point from 25th January to 8th February. The second wave of SGD basket weakness coincided with the pick up in US equity market volatility and therefore is consistent with regional risk premiums being repriced higher. This recent pick up in uncertainty has not altered our Singapore macro team's view that fundamental conditions remain suited for MAS to tighten monetary policy in April via a +.5 slope increase, thus on this basis we are not expecting weakness in the SGD basket to be persistent. That said, SGD NEER oscillating around the mid point has historically coincided with higher 1M USDSGD implied volatility and the latter has tended to result in higher Sors. 3M Sor fixed at new 2 year highs last Friday which can partly be traced to risk premiums being repriced due to the pick up in implied volatility. Another factor driving Sors higher last week is more transitory in nature, that being this week's holiday shortened trading session. Overnight SGD deposits and FX swaps started to shift higher on Thursday 8th February as interbank participants moved to cover and roll their obligations for this week, which has resulted in short term SGD liquidity demand picking up. We expect SGD funding costs to remain sticky this week, but the concurrent pick up in USDSGD FX implied volatility and weaker SGD basket suggests that the subsequent unwinding of seasonal factors might leave Sors at a higher level than where they first begun their ascend. Spill over from Equity markets uncertainty limited thus far The abrupt break in the calm of equity markets recently has only had limited spill over effects thus far. Short dated USD funding premiums, via 3M FX swaps, across JPY, EUR and GBP have increased recently but their adjustment process has been well behaved compared to the sharp moves in December 217. Longer term demand for USD has also shown some signs of short term pressure but prevailing levels are still nowhere close to historical periods of stress. 3s6s Bors basis have widened a touch recently as well as the 3M US Libor vs. OIS spread, but the story is similar to that in currency basis, namely one of relative resilience so far. Short term view: * 3M SORs to fluctuate between 1.1 and 1.3. * 3M US Libor repricing higher ahead of expected March FED hike. Daily changes in 3M SOR Attributed 15. 1. 5.. -5. -1. FX Swap Libor SOR.45.4.35.3.25.15.1.5. UOB SGD NEER Deviation From Mid Point 1M USDSGD risk SGD NEER deviation (rhs) 1.4 1.2 1..8.6.4.2. -.2
3 P a g e Bonds and Interest Rate Swaps Asset Swap Spreads SGS Benchmark Tenor Current T - 1 T - 2 T - 3 T - 4 T - 5 SIGB 1 5/8 1/1/19 2Y -2.2-4.4-4.7 -.9-1.6 -.3 SIGB 1 3/4 2/1/23 5Y -21.6-2.4-2.4-17.2-15.4-17. SIGB 3 1/2 3/1/27 1Y -26. -25.3-22.5-19.2-18. -16.7 SIGB 3 3/8 9/1/33 15Y -23.6-23.4-21. -16.9-17. -17.3 SIGB 2 1/4 8/1/36 2Y -23.7-25.1-23.5-2.8-2.4-2.4 SIGB 2 3/4 3/1/46 3Y -18.9-19.9-16.5-14.6-15.4-15.2 Negative UST bias increased The latest CFTC update of combined non-commercial positions showed an increase in 1Y UST shorts from 16k contracts in the week of 29th January to 284k contracts in the week 5th February. Over the same period the average 1Y UST yield increased from 2.74 to 2.8. The prevailing magnitude of 1Y UST shorts is comparable to the period between Dec 216 to Mar 217 when investors were pricing in faster growth and fiscal spending increases from the new Trump administration. The drivers this time has been a challenging net supply outlook as well as fears of inflation pick up and a faster pace of FED rate normalization. Thus far, UST bears have not been dissuaded from pushing the envelope despite equity market volatility and tighter financial conditions. Resilience of higher yields and nascent stretched positioning suggests that a near term test of 3. for the 1Y UST remains on the cards and with it a period of elevated financial market volatility. Eventually the cycle of higher yields and higher volatility will break, either investors become conditioned to higher yields when negative feedback loops fail to develop or expectations on growth and cash flows receive a significant boost. But until then, we are likely to see 1Y USTs continue challenging asset valuations via discount factor shocks. Wider SG bond swap spreads SG bond swap spreads widened across the curve last week towards their widest levels in almost 1 year. Repricing of bondswap spreads have mirrored weakness in the SGD NEER basket and the related tightening of Sor's discount to Sibor over the past couple of months. SG IRS have gradually rediscovered their enthusiasm for higher yields as the anchors of strong currency and flat rates forward curves were being cast aside, while SGS have benefited from relative stability in domestic funding markets. The clearest illustration of the aforementioned can be seen from the performance of SG IRS and SGS vs their US equivalents; for example the 1Y SG vs. US IRS spread has flat lined since the middle of January while on the other hand the 1Y SGS vs. UST spread made new wides recently on 7th February. Looking ahead, both the SGD NEER and rates forwards factors lack clear accelerants in the short term thus we would expect the SG bondswaps to settle in a sideways range with the wings of the curve more exposed to giving up their recent widening gains. Short term view (benchmark): * 1Y UST 1 week expected range 2.75/2.9. * 1Y SGS 1 week expected range 2.2/2.35. 3.4 3. 2.6 2.2 1.8 1.4 1. Bond Yield Curves as at 12 Feb 218 3.18 2.88 2.58 2.1 2.75 2.25 1.92 1.56 2Y 5Y 1Y 3Y SGS 1-1 -2 UST -3 SGS Asset Swap Spread Curve ASW (-1week) ASW (current)
4133 4259 42424 42669 42881 SGD mio 4 P a g e The Next SGS Auction Next Auction: 3Y Re-open Auction: March 246 (NA161H) Size Announcement Date: Auction Date: Monday, 26 February, 218 Auction Size: T.B.A Monday, 19 February, 218 Key notes from 3Y SGS auctions between 212 to 217 * Average auction size excluding mini auction = SGD 1.7bio (Max SGD 2.1bio, Min SGD 1.2bio) * Average Bid to Cover excluding mini auction = 1.82 times (Max 2.26 times, Min 1.57 times) * Average price concession across all previous auction was around 5. Ever since the introduction of mini auctions in 215, our framework for thinking about SGS long bond auction sizes has shifted away from a margin of safety mind set and more towards one that 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. 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 in the long end bonds. Overall, this will reduce the potential of long bonds size announcements surprising on the upside. In terms of pre-auction set up, the 3Y tenor faces more limitations compared to other tenors due to liquidity issues impacting on the efficiency of hedges. Thus, falling back on the principle of keeping things simple, curve steepeners tend to be one of the more consistent performer ahead of 3Y auctions. 3 Year SGS Auction History (212 to Date) 2,5 1,5 5 Mar-12 Feb-13 Feb-15 Feb-16 Oct-16 May-17 2.5 2. 1.5 1. Auction Amount (lhs) Bid-to-Cover Ratio (rhs) Total Yield Change From 2 Trading Days Before Auction 1 5-5 Pre Auction Average Yield Change (212 to Date) 6 4 2-19 -16-13 -1-7 -4-1 -2
SGD Millions SGD Billions 5 P a g e Auction Dashboard Mar 246 closing yield (): 2.748 Mar 246 ASW spread (): -18.9 Mar 246 vs 3Y UST (): -42.9 1s3s (): 5.1 Weekly Change (): 1. Weekly Change (): -2.1 Weekly Change (): -2. Weekly Change (): 6.6 Directional * March 246 rallied last week despite UST yields still poised to probe the upside. Price gains were given back today. * 3Y SGS yield at 1 year high likely attracting some early profit taking on auction shorts. * 2.8 is the next obvious target, but the next concession push may have to wait till after auction size announcement. Spreads and curve * Mar 246 significantly outperformed 3Y UST last week, while also outperforming SG IRS. * The 1s3s curve steepened to its highest level in more than a year. * Hedge inefficiencies will help 1s3s curve steepeners, but we are mindful not to overstay welcome should supply under deliver next week. Notes on 217 SGS Cash Flows * March/September are chunky coupon months for SGS with SGD 737mio to be distributed. * May/November are dry months for SGS 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 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 Rates Biases Inception Date Currency Type Format Entry Stop Target Rationale at inception 2-Jan-18 2-Jan-18 SGD SGD IRS Boxspread SGS curve steepener 2s1s SG IRS flattener vs. US IRS steepener Long 1Y SGS vs. Short 2Y SGS 3 5 1 36 25 5 * 2s1s SG IRS curve flattening has also lagged US curvature changes in 217. Boxspread at attractive level. * Convergence trade at the right place and right time for the current phase in the FED and MAS tightening cycle. * Full complement of 15Y, 2Y and 3Y duration scheduled, plus potential for more via mini auctions. * 1s2s downtrend since 212 broken and the curve looks to establish a new higher range.
6 P a g e Benchmark Levels Country Rates Current 1 week change 1 month change 1 year change 3M Libor () 1.82.3.12.79 2Y Bond () 2.1.8.1.91 USD 1Y Bond () 2.88.18.34.48 1Y IRS () 2.87.17.35.52 2s1s Bond curve (bp) 78.2 1.1 23.4-43.6 3M SOR () -.1.15.4 SGD 2Y IRS () 1.68.3.21.6 1Y IRS () 2.57.5.37 -.1 1Y Bond () 2.25 -.5.17 -.8 2s1s IRS curve (bp) 89. 1.4 16. -16.1 3M Klibor () 3.69..25.26 MYR 2Y IRS () 3.8 -.2.7.24 1Y IRS () 4.13 -.2.6.5 1Y Bond () 3.96.2.12 -.16 2s1s IRS curve (bp) 33. -.5-1. -18.5 3M Bibor () 1.58.. -.1 THB 2Y IRS () 1.47 -.3.5 -.21 1Y IRS () 2.54.5.27 -.7 1Y Bond () 2.41.1.11 -.29 2s1s IRS curve (bp) 17.5 8. 21.2 14. 3M Jibor () 5.3 -.1. -1.54 IDR 2Y Bond () 5.24 -.2 -.16-1.63 1Y Bond () 6.34..15-1.14 2s1s Bond curve (bp) 11.4 1.8 31.4 48.5 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