SGD Rates: Movements of 5Y SGS, SOR and SORA
- SOR IRS dipping below SGS yields is not abnormal
- In relative terms, 5Y SGS yield does look a tad high compared to SORA and SOR
Rates: 5Y SORA, SOR and SGS
There have been some investor concerns about the tightening SGS-swap spreads (turning more negative) over the past few trading sessions. We do not think that this development is particularly odd. Taking a longer-term view, SGS-swap spreads have been narrowing over the past few years as it became clear that there should not be a credit premium for centrally cleared swaps. It can also be argued that swaps are more liquid than bonds. Accordingly, we would expect yields and swaps to trade close together under non-stress conditions. This has broadly been the case since the start of 2019.
Beyond the structurally tighter spreads, there should be currency-related considerations. Typically, the SOR is more impacted by expectations of SGD performance vis-à-vis the USD. In periods of better global growth and USD weakness (such as 2019), SOR IRS tends to trade lower than SGS yields. However, during periods of stress, SOR IRS tends to head much higher, keeping a significant premium over its SGS counterpart. This premium has since been eroded as market stresses eased. For the 5Y tenor, SGS-swap spread of -4bps does not look stretched by any measure. Meanwhile, the 5Y SGS-SORA OIS spread was widened close to the bottom of its recent trading band, caveating that 5Y SORA OIS is still not as liquid. We note that SORA-SGS spreads should be much more stable given that both are cash rates.
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