SGD Rates: gauging SSB demand
- SSB has not been garnering much attention
- That is set to change as yields have risen significantly
- There could be marginal liquidity tightening if rates stay high
Singapore Savings Bonds (SSBs) will see increasing demand from individuals in the coming quarters as short-term yields continue to grind higher. To recap, SSBs are a special type of Singapore Government Securities (SGS) with features that make them suitable for individual investors. These bonds are redeemable at par in any given month without any penalties for early exit. We had analysed the impact of SSB on SGD liquidity condition previously (see here). Many of those conclusions still hold and we now take another look at these dynamics in today’s context.
Short-term USD interest rates are finally rising as the Fed kicked off with a 25bps hike in March. This marks the exit from two years of extraordinarily low interest rates as the world battles the pandemic. Moreover, the Fed has flagged the likelihood that jumbo-sized (50bps) hikes may be in the offing. Short-term SGD rates (including the SORA), which are highly correlated to USD rates, should head meaningfully higher in the coming quarters. Accordingly, this would impact the demand for SSB as yields become more attractive.
Our analysis indicated demand is highly sensitive to the 1st year yield in SSB. Total demand tends to pick up meaningfully once the 1st year yield get close to 1.5%. While the latest issue offers a rate <1% (for the 1st year), there has been a noticeable pick up in SSB applications from depressed levels seen in much of 2020/21.
If the Fed funds rate heads to 2.5% by end-2022 as we expect, we would reasonably expect that short-term SGD rates would climb towards 1.5%. All else equal, SSB could see demand of about SGD 370mn a month, similar to average seen in the 12 months ending June 2019 (when USD and SGD interest were high). To put things into perspective, the average total applications for the first four months of 2022 stands at only SGD 100mn.
There are some nuances to consider. First, how long would the period of high interest rates last? If the US keeps rates high for two years, the net drain could be around (SGD 4.4bn). This figure may seem small but could still tighten liquidity at the margin.
Second, 12M fixed deposit (FD) rates in Singapore appears to be high. Given the high correlation between SSB demand and 1st year yields, investors probably view FD and SSB as substitutes. In 2015 to 2019, FD rates are significantly lower than SSB’s 1st year yield. This could account for why demand for SSB was relatively strong. By contrast, the 12M FD rate is now meaningfully higher than the SSB’s 1st year yield. This dynamic could dampen SSB demand somewhat.
Third, the stickiness of SSB holdings should be considered. As interest rates step up, it gets more and more attractive to continue holding. This also has to be balanced against new SSB issues, which would look increasing attractive to current holders. SSBs issued over the past two years could be vulnerable to switching as investors redeem issues with low yields and redeploy into newer issues (with higher yields).
The upshot is that SSBs are going to be a drain on system liquidity. While the quantum is relatively small compared to the total bills outstanding, it could still be a swing factor if investor demand stays high for an extended period. This could be relevant if liquidity conditions are somewhat tight as shown by elevated MAS bill rates and FD rates. We expect demand for SSB to surge at the upcoming issuance given the that the cutoff yield for the 1Y T bill auction hit 2%.
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