GBP is not a one-way bet up; SGSs as low beta USTs

GBP strength will not be a one-way bet. Selected tenors of SGSs look relatively attractive.
Philip Wee, Eugene Leow05 Dec 2019
    Photo credit: AFP Photo

    FX: GBP is not a one-way bet up

    Election fever has gripped the British pound which closed above 1.30 for the first time since May. Sterling has been rallying after YouGov predicted in late November a 68-seat majority for Prime Minister Boris Johnson and his Conservative Party at next week’s general election on December 12. YouGov correctly foretold that former Prime Minister Theresa May would lose the majority at the previous snap election in June 2017.

    Despite the optimism, GBPUSD still needs to first overcome the year’s high around 1.3340. The election is potentially a “buy the rumour, sell the fact” event risk. A Tory majority would not be able to paper over the hard trade negotiations ahead with the EU, the still-weak UK economy, the Bank of England’s rate cut bias and the risk of fiscal slippages hurting the country’s sovereign debt rating.

    Unfortunately, no one is truly ready to write off the prospect of a hung parliament a week from now. The debate between Mr Johnson and opposition Labour leader Jeremy Corbyn (held after the YouGov poll) was considered a tie. Like the Tories, support for Labour has also increased at the expense of the Liberal Democrats and the Brexit Party. YouGov would not discount a hung parliament if the Conservative-Labour lead narrows to 7 points. This outcome would pummel GBPUSD below 1.30 to 1.25 again. The return of political paralysis could renew prospect of a no-deal Brexit on January 31, 2020, and pressure GBPUSD towards 1.20 again.

    Rates: SGSs as low beta USTs               
    We think that SGSs will continue to hold up relatively well through the ongoing bout of volatility and see pockets of value emerging in the belly tenors. SGSs have been relatively stable compared to US Treasuries. Over the past three months, 5Y SGS yields have hovered within a 12bps range (1.58-1.70%) compared to the 40bps range (1.35-1.75%) for 5Y Treasuries. Given that the SGD has strengthened versus the USD over the period, the risk-adjusted return for SGSs is compelling. In periods of risk aversion, underperformance in SGSs versus USTs is inevitable. However, lower beta in SGSs could be attractive to investors.
    We think that 2Y and 5Y SGSs are relatively attractive.  While USTs have rallied on China-US trade war risks over the past two trading days, yield declines in SGSs have been more muted. We suspect that profit taking amongst the local players as year-end approaches may be the key factor limiting a bigger rally in SGSs. SGS-swap spreads also look stretched in the 2Y and 5Y tenors, at 9bps and 13bps respectively. From an asset-swap perspective, these tenors should still be enticing to USD-based investors.

    Philip Wee

    FX Strategist - G3 & Asia


    Eugene Leow

    Rates Strategist - G3 & Asia

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.