SGD Rates: Spotting the distortions


There are relative value opportunities amid SGD rates distortions.
Eugene Leow06 May 2021
  • SGD rates shrugged off tighter COVID-19 measures
  • Domestic factors have turned more important
  • We see opportunities for RV plays – BSS and vs USD rates
Photo credit: AFP Photo


Spotting the distortions

The impact of tighter COVID-19 measures (a return to Phase 2) on SGD interest rates is negligible. Theoretically, we would expect weaker sentiment to widen SOR-LIBOR spreads, but this has not been the case. Spreads in the 2Y tenor has tightened modestly while that of the 10Y tenor has been stuck in a relatively tight range. By contrast, the equity market and the USDSGD appear to have reacted much more. Aside from USD rates (which have been consolidating), the key drivers for SGD rates are where short-term rates (SORA) settle, the lingering SINGA bond premium in the SGS curve and the transition towards SORA as the new reference rate. These factors are distorting SGD rates and are creating opportunities for investors willing to wait over a longer horizon (a few months). We lay out a couple of ideas below:


First, intermediate tenor (5Y) SGS is expensive (yields are too low) relative to SOR and SORA swaps. This can be attributed to increased worries about USD rates rising and wariness by SGS investors on duration risk (switching to shorter-dated bonds from longer dated ones). We think the SGS-swap spread (defined as swap rate less yield) may be too wide (21bps for the 5Y tenor) and there is scope for this to narrow (towards 5bps by the end of the year) over the medium term.

Second, the SORA-SOFR basis is probably too wide across many tenors. To be sure, the SORA-SOFR spread (using the overnight tenors) has too few data points to compare across economic cycles. Instead, we can proxy SOFR using the O/N repo. The takeaway over the past 10 years of data is that if short-term USD rates are floored near zero, relative liquidity conditions drive the spread. Converse, when the Fed starts hiking rates (typically this happens in favourable global growth conditions), SORA tends to lag the climb in the O/N repo. 5Y SORA-SOFR spread of 25bps is too wide. We would expect this rate to close towards 5-10bps over the coming few months.


Third, take advantage of relatively elevated short-term SGD rates. The yield premium offered by short-dated SGS and MAS bills over comparable UST and T bills is significant (between 25 to 25bps out to the 2Y tenor). For investors with excess cash, SGS and MASB should prove extremely attractive.

Fourth, the transition to SORA could keep the SOR-SORA basis tight in the immediate few months as entities embark on the switch ahead of SOR’s phasing out. This technical factor will likely fade towards the end of the year when the majority of such trades are done. We would also note that SOR swaps could become a lot less liquid towards the end of the year.

To read the full report, click here to Download the PDF.

Eugene Leow

Rates Strategist - G3 & Asia
eugeneleow@dbs.com

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company 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. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, 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 Company 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 Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

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

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.