Asia Rates: First auction for SRBIs; Stable liquidity to anchor SORA

Stable liquidity anchors SGD rates.
Group Research, Duncan Tan14 Sep 2023
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    IDR Rates - The first auction for the new 6/9/12M SRBI instruments is scheduled for tomorrow. We think BI is likely to target higher-than-average SRBI yields in the near term to attract more foreign inflows, at a time when the broad US Dollar is supported and Indonesia's current account has fallen back into deficit. At tomorrow’s auction, we expect yields to be between 6.35-6.55%. SRBIs are carry plays with the primary risk exposure to FX. Therefore, foreign interest would be relatively softer when the broad US Dollar is strong, as compared to when the broad US Dollar is weak. Some investors could however find current spot levels of IDR (~15375) to be cheap and buy SRBIs for both carry and potential for FX appreciation. For investors who want to hedge out FX risks, we estimate hedging costs to be around 80bps for offshore hedging and 30bps for onshore hedging.

    SGD Rates - The outperformance of front-end SORA OIS vs SOFR OIS is stalling somewhat in September. Month-to-date, 2Y SORA OIS is up 17bps vs 2Y SOFR OIS's 15bps. Broad US Dollar strength, on the back of US macro resilience and expectations of higher-for-longer Fed rates, appears to be driving a higher-than-usual passthrough from USD to SGD rates. While the scope for outperformance could be more limited in the near term, we don't think front-end SORA OIS would necessarily underperform or rise more than SOFR OIS. We have a USDSGD forecast of 1.37 at end-3Q and 1.36 at end-4Q, which implies that upside room for USDSGD would be narrowing and passthrough from USD to SGD rates could moderate ahead. Stable expectations for SGD liquidity would also be a key anchor against the pull of rising US rates. Bank Loans are expected to stay on a downward trend, which could drive Banking Loan-Deposit Ratio closer towards 70% and continue to support excess Banking liquidity. As a result, Banks have continued to deploy excess liquidity/balance sheet into Debt Securities, which are rising as a % of Total Assets. When we look across the key drivers of Aggregate liquidity (MAS/Govt issuances, FX intervention etc), it appears that liquidity has widened (i.e. net injection) in 2023 year-to-date, rather than tightened.

    Duncan Tan

    Rates Strategist - Asia

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