Victor Yong Victor.YongTC@UOBgroup.com Global Economics & Markets Research Email: GlobalEcoMktResearch@uobgroup.com URL: www.uob.com.sg/research Monday, Rates Insights Curve Steeper over the Past Week but Repricing could Plateau until Auction Size Announcement Market Summary Over the past week, 3M SOR decreased by -2.6bps, 3M SIBOR was unchanged 0bps and 3M LIBOR increased by 0.8bps. The 1M vs. 6M SOR curve flattened by -0.4bps and the 3M SOR vs SIBOR spread contracted by -2.6bps. 10Y has outperformed vs. UST and underperformed vs. SG IRS. The 10Y SG IRS yield decreased by -0.1bps, which was less than 1 std dev based on historical yield changes over the past month. The 5Y vs. 30Y SG IRS curve closed today at 0.73 and has steepened by 0.3bps over the past week. 0.08 1 Week Benchmark Yield Changes 0.20 SG IRS Weekly Yield Change Relative To 1 and 2 Standard Deviation Bands 0.04 0.10 UST 0.00 0.00 IRS -0.10-0.04 2Y 5Y 10Y 30Y -0.20 2Y 5Y 10Y 15Y 30Y 10Y SG IRS 2s10s SG and US IRS Curves 2.50 0.98 0.72 2.48 2.46 2.44 2.42 0.96 0.96 0.70 10-Apr 17-Apr 24-Apr 1-May 2.40 2.39 2.38 2.36 2.34 2.32 2.30 8-May 0.94 0.92 SG (lhs) 0.68 US (rhs) 1-May 2-May 3-May 4-May 5-May 8-May 0.68 0.66
2 P a g e Money Market Rates Historical Volatility Annualized () 30D 90D 180D Historical Volatility Annualized () 30D 90D 180D 1M SOR 62.6 111.6 243.3 3M SOR 47.0 57.1 77.7 6M SOR 30.8 30.6 37.4 1M SIBOR 19.7 15.7 14.1 3M SIBOR 15.1 12.4 10.8 6M SIBOR 0.5 3.9 6.7 SORs still a function of liquidity US Libors have been grinding higher and SGD NEER has been mean reverting back towards the mid point, yet SORs (or more precisely USDSGD FX swaps) remain pressured lower. In short, ample domestic liquidity condition continues to be the marginal price setter and has overshadowed changes in the base rate and currency. Predicting a turning point for inflows is akin to picking an inflection point for animal spirits, but on a historical basis the prevailing USDSGD FX swap discounts are already in line with the level of US Libors. Significantly deeper FX swap discount from current levels will therefore require a fresh catalyst to drive greater inflows and reset prices to a new lower equilibrium. Short term view: * 3M SOR to be contained within 0.70/0.90. * US Libors to resume its grind higher after crossing over into May. Daily changes in 3M SOR Attributed UOB SGD NEER Deviation From Mid Point 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 bps FX Swap Libor SOR 0.80 0.70 0.60 0.50 0.40 1M USDSGD risk reversal (lhs) SGD NEER deviation (rhs) 0.17 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.30 25-Apr 26-Apr 27-Apr 28-Apr 2-May 3-May 4-May 5-May 8-May 0.0 Bonds and Interest Rate Swaps Asset Swap Spreads Benchmark Tenor Current T - 1 T - 2 T - 3 T - 4 T - 5 SIGB 21/206/01/19 2Y -24.6-26.5-23.5-26.6-28.0-29.4 SIGB 13/404/01/22 5Y -34.1-34.8-32.6-34.5-35.8-36.2 SIGB 31/203/01/27 10Y -24.7-25.6-24.9-25.7-26.1-26.6 SIGB 27/809/01/30 15Y -21.1-23.2-23.9-24.0-24.5-24.8 SIGB 21/408/01/36 20Y -21.5-23.2-23.6-25.4-25.8-27.1 SIGB 23/403/01/46 30Y -20.0-22.1-22.9-25.1-25.3-28.0 Stepping back from left tail Last Friday's US non-farm payrolls printed slightly above expectations with revisions to previous months roughly evening out. Overall employment picture continues to suggest equilibrium around longer term averages after smoothing out individual month's variability. Wage inflation came in under expectations and when combined with recently softer CPI prints will give
3 P a g e investors some comfort that there is little urgency for the FED to step harder on the monetary brakes for the moment. Improvements in geopolitical sentiments have continued apace, the global economic policy uncertainty index has eased back by around 30 from its post US election highs and stands to make further retracements with Macron's victory in the French election. Whilst none of the aforementioned can be considered as a new or significant positive shock, they do at the very least contribute towards walking investors' focus back from left tail risks. From the perspective of 10Y UST, these developments will contribute towards cementing yield support at 2.28/2.30. But we're wary of complacency closer to home 10Y price volatility over the past 30 days is almost half of what it was over the past 360 days, 3.76 vs. 6.62 respectively, which has been partly a consequence of investors' disillusionment with the US led reflation narrative. Although the drivers of volatility suppression and carry trade flows remain largely intact, we are wary of complacency in the short term. To wit, big picture proxies for emerging markets performance such as the ratio of ADXY to DXY (currencies) and VWO to VEA (equities ETFs) have either stalled or are declining recently. In addition, the combination of credit tightening in China and weakness in the Commodities complex has the potential to trigger a negative feedback loop which would then elevate capital flight concerns in the region. Therefore, we are bearishly biased towards the 10Y this week. Short term view: * 10Y UST 1 week expected range 2.30/2.40. Left tail risks reduced but still lacking strong upside catalyst in the short term. * 10Y 1 week expected range 2.12/2.22. Risk sentiments will be sensitive towards China and Commodity in lieu of immediate downside triggers in developed markets. Bond Yield Curves as at 0 Asset Swap Spread Curve 3.50 3.00 2.50 2.00 1.50 1.00 0.50 2.99 2.35 1.88 1.32 2.14 2.47 1.60 1.22 2Y 5Y 10Y 30Y UST bps -15-20 -25-30 -35-40 ASW (-1week) ASW (current) The Next Auction Next Auction: 30Y re-open 01 March 2046 (NA16100H) Size Announcement Date: Auction Date: Monday, 29 May, 2017 Auction Size: T.B.A Monday, 22 May, 2017 * Max auction size: SGD 2.1bio. Minimum auction size: SGD 1.2bio (excluding mini-auction) * Overall weighted average bid to cover: 1.88 times. New issuance w.ave bid to cover: 1.92 times. Re-open auction w.ave bid to cover: 1.83 times. Since the introduction of 30Y maturity back in April 2012, the auction cut off yields has been surprisingly stable with a high low range of 2.76 to 2.87. The only exception was last year 30Y mini auction in October which cut at 2.27 and has the dubious distinction of only being in the money for 1 day post auction. This is not to suggest that historical auction cut offs are a realistic concession target for the upcoming 30Y auction, rather it is the outlier yield cut that ought to serve as a reminder that whilst 30Y is justifiably special this "specialness" does not mean that no price is too high to pay for the privilege of ownership. Including all previous 30Y auctions, bond yields have increased on average by around 13bps from levels prevailing 20 trading days ahead of auction day. Peak concession has typically been on the 3rd trading day before auction and the 30Y tends to mount a last minute rally as Primary Dealers look to take some risk off the table.
4 P a g e Previous 30Y auctions - Size and Demand Average cumulative 30Y yield change before auction SGD mio 2500 2000 1500 1000 500 0 2-Apr-12 1-Mar-13 2-Mar-15 1-Mar-16 1-Nov-16 Auction Size (lhs) Bid to Cover (rhs) 2.50 2.00 1.50 1.00-19D -17D -15D -13D -11D -9D -7D -5D -3D -1D 0.20 0.16 0.12 0.08 0.04 0.00 Auction Dashboard Mar 2046 closing yield (): 2.468 Mar 2046 ASW (bps): -20.0 Mar 2046 vs 30Y UST (bps): -51.8 10s30s (bps): 32.9 Weekly Change (bps): 7.2 Weekly Change (bps): 8.1 Weekly Change (bps): 9.1 Weekly Change (bps): 4.9 Over the past week, 30Y continued to cheapen and recorded a weekly yield gain of 8bps to take the cumulative yield gains since the mid April lows to 14bps. Going by the average historical behaviour, cheapening in the 30Y could slow this week and pick up again when we get closer to auction size announcement day, 22 May. 30Y relative performance has also been consistent in the past week, cheapening against both UST and ASW and the 10s30s curve steeper. Auction size announcement will be the next trigger for repricing. Market expectations will be anchored on the well demanded 20Y mini auction in April, which may bias the consensus for 30Y size higher. Therefore, any downside surprise in the 30Y size could trigger a short covering rally and flatten the 10s30s curve. At this early stage, we expect that if 30Y supply were to come out under SGD 1.5bio that should be "underwhelming" enough to dampen auction concession interest. Auction bias * Stay long 10s30s curve steepener, curvature change remains skewed in favour for stable to steeper curve ahead of supply. * Tactical auction shorts close to first level target at 2.50, lightening of position is preferred here as further cheapening may be more laboured between 2.50 to 2.55. Retracements back under 2.45 will be opportunities for scaling back into auction shorts. Notes on 2017 Cash Flows * March/September are chunky coupon months for with SGD 646.1mio to be distributed. * February/May/August/November are dry months for coupons. * No new coupons will be added to dry months in 2017. * Maturities for 2017 total SGD 10bio due in April (SGD 7.5bio) matured and October (SGD 2.5bio). Coupons for 2017 Maturity for 2017 SGD Millions 800 600 400 200 0 SGD Billions 3.0 2.5 2.0 1.5 1.0 0.5 0.0 December November October September August July June May April March February January December November October September August July June May April March February January
5 P a g e Rates Biases Inception Date Currency Type Format Entry Stop Target Rationale at inception 3-Apr-17 SGD Widener 27-Mar-17 SGD Steepener 20-Jan-17 SGD Steepener 3-Jan-17 SGD outperform 3-Jan-17 SGD Steepener Long 2Y (Oct 2019) vs. Pay 2Y SG IRS Short 30Y Bmk vs. Long 10Y Bmk Long 5Y (Oct 2021) vs. Short 20Y (Aug 2036) short 10Y UST vs long 10Y 5s10s SG IRS 18bps 10bps 30bps 23bps 13bps 40bps 86bps 82bps -1.5bps 75bps 103bps - 20bps 30bps 48.5bps 40bps 70bps Outright levels have fallen to the region that is consistent with SOR volatility suppression, thus limiting the extent of further IRS led spread tightening. No cause for to structurally underperform IRS. 10s30s curvature steepening bias due to 30Y supply in May. Main drawdown catalyst will be from risk aversion spikes that trigger short covering in the 20Y region. 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 -4bps. 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 2017. Therefore we expect to see 10Y UST spread moving further into positive territory over the course of 2017. 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.
6 P a g e Benchmark Levels Country Rates Current 1 week change 1 month change 1 year change 3M Libor () 1.18 0.01 0.03 0.55 2Y Bond () 1.32 0.05 0.04 0.59 USD 10Y Bond () 2.35 0.03-0.03 0.57 10Y IRS () 2.27 0.01-0.04 0.70 2s10s Bond curve (bp) 102.7-1.8-7.0-1.8 3M SOR () - -0.03-0.12-0.24 SGD 2Y IRS () 1.43-0.01-0.11-0.23 10Y IRS () 2.39 0.00-0.10-0.04 10Y Bond () 2.14 0.03-0.05 0.01 2s10s IRS curve (bp) 95.7 0.9 1.0 18.2 3M Klibor () 3.43 0.00 0.00-0.25 MYR 2Y IRS () 3.60-0.01-0.06 0.09 10Y IRS () 4.01 0.01-0.09 0.01 10Y Bond () 3.94-0.10-0.18 0.05 2s10s IRS curve (bp) 41.0 1.5-3.0-7.5 3M Bibor () 1.59 0.00 0.00-0.01 THB 2Y IRS () 1.70 0.01-0.02 0.14 10Y IRS () 2.57 0.02-0.07 0.33 10Y Bond () 2.73 0.02 0.08 0.95 2s10s IRS curve (bp) 87.0 1.0-5.0 19.0 3M Jibor () 6.85 0.00 0.00 0.31 IDR 2Y Bond () 6.44-0.03-0.10-0.48 10Y Bond () 7.04 0.03-0.05-0.69 2s10s Bond curve (bp) 60.6 5.8 4.3-21.0 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. 193500026Z