SGD Rates: Juicy pickup for USD and EUR-based investors

SGS pickup is juicy.
Group Research, Eugene Leow13 Sep 2022
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    Singapore government securities are likely to appeal to real money investors as duration fears cool. In absolute terms, the entire SGS curve is hovering close to or above 3%. Historically, SGD rates tend to be sticky around these levels even if USD rates push much higher. With the Fed likely to deliver another 150bps worth of hikes this year and the MAS likely to tighten again in October, this twin tightening development should lead to SGD rates outperformance from a receive perspective. It would also help if the USD shows any tentative signs of stabilization.

    We would also highlight the attractive pickup for USD and EUR-based investors in the 5Y and 10Y tenors. The biggest change is the adjustment lower in USDSGD cross currency basis swaps due to specific issuance-based flows, not due to risk aversion driven demand for USD. The more negative this figure turns, the larger the pickup for foreign investors, all else equal. For USD-based investors, the all-in pickup for 10Y SGS (over UST)  has climbed close to 60bps. Similarly, EUR-based investors can enjoy close to 100bps of pickup in SGS over German Bunds.

    To be sure, attractive levels are important but not sufficient conditions for investors to take action. However, we should note that the recent bout of rates volatility is not quite as acute as that seen in June. We can quantify this by looking at financial conditions as well as implied volatility in rates. Some stability (especially post FOMC next week) could start to attract asset managers to be more comfortable taking duration risks.

    From an issuance perspective, it no longer makes sense to issue in 5Y and 10Y SGD and swap to USD. Instead, we think it is clearly more attractive to issue USD papers (assuming constant credit and bond-swap spreads) and swap to SGD to lower funding costs. This too supports our view of SGD rates outperformance in the mid to longer tenors (versus USD rates) and that the USDSGD cross currency basis is too negative. Note that this does not apply to the shorter tenors (out to about 3Y). The bond-swap spread (SORA less SGS) in that segment is very wide and about covers the negative pickup from the USDSGD cross currency basis. It might still be feasible to issue SGD and swap to USD in this short-dated segment.

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
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