The spread of SORA OIS over SOFR OIS is nuanced across the tenors. At this juncture, there should be minimal stress in the rates space. Accordingly, the SORA-SOFR spread should reflect the estimated pace of appreciation in the SGD NEER. Arguably, this is clearest in the front of the curve where the market is still pricing in twin tightening (relatively high USD rates and a relatively steep SGD NEER slope). Further out the curve, as the Fed and the MAS normalizes, it makes sense for the SORA discount to SOFR to reduce as the Fed cuts rates and the MAS reduces the slope at some point in future. Against a backdrop of rapidly shifting narratives, the 2Y SORA-SOFR spread has been volatile over the past few months. In December / early January, the market was too optimistic on the Fed, pricing in early and aggressive easing (>6 cuts at one point) for the year. Frontend SGD rates lagged the down move in USD rates, lifting the 2Y SORA-SOFR spread to -116bps at one point. As firm US data materialized, this spread has now moved closer to –140bps. At the narrowest point in 2023, this spread was closer to -160bps. Much like the narrative on USD rates (rotation between recession, Goldilocks and no landing), we think that SORA-SOFR spreads are trapped in a range and it makes sense to fade extremes.
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