SGS: Slim pickings
- ST SGD rates are likely to climb modestly
- Fed and MAS policy will be key
- LT SGD rates unlikely to push new highs
- Betters levels await paying USD vs SGD
The rise in SGD rates (SGS yields and IRSs) will be much more muted in 2019. Aside from a more measured pace of Fed hikes (DBSf: 2 hikes, compared to 4 in 2018), volatility is likely to be elevated in the current late cycle, nudging investors into the safety of SGSs. We have also made similar arguments for USD rates (see here). Theoretically, there are four outcomes to policy direction from the Monetary Authority of Singapore (MAS) and the Fed (see table). However, of these four, only two - the Fed and the MAS both tighten or they both pause – appear plausible. Implicitly, we are assuming that the global growth outlook dominates and may lead to similar stances by the two central banks.
If global growth holds up and the MAS and Fed both tighten, the passthrough from higher USD rates to SGD rates could be limited. For example, if the Fed hikes by a cumulative 50bps (taking 3M Libor up by a similar magnitude) by end-2019, a large chunk of this would not be reflected in the Sibor / SOR if the MAS steepens the S$NEER slope by another 0.5% pa to an estimated 1.5% pa. Conversely, if global growth took a turn for the worse, the Fed and the MAS would likely be on pause. In which case, USD and SGD rates would be broadly stable. Against this backdrop where short-term SGD rates are likely to stay anchored, we suspect that investors will reach for duration whenever SGD rates sell off.
It must be noted that the market is leaning towards a Fed pause and MAS tightening. We are not convinced this scenario will play out for 2019.
There will be better opportunities to receive SGD rates (or buy govvies) in the coming few months. Currently, we think that SGD rates are still somewhat depressed. Mid-to-long tenor (5Y onwards) SGS yields may get dragged up when risk appetite stabilises. Moreover, the SGS issuance calendar tilted towards the intermediate and longer tenors. Out to May, there are two 5Y issuances, a 10Y and another 30Y scheduled. Note that these issuances come ahead of the two SGS maturities in June and October totaling SGD 15.1bn. On another note, the prospect of ultra-long tenor (>10Y) statutory board issuances (see here) will weigh on 15Y and 30Y SGSs.
Receiving SGD rates versus USD rates for the longer tenors (5Y-10Y) is interesting but think that levels may become more favourable. Currently, receiving 10Y SGD IRS offers around 2.5bps carry and roll over three months. Comparatively, paying 10Y USD IRS offers around 1.2bp over the same timeframe. The net carry and roll from this trade is positive. The spread between the two rates (10Y USD IRS less 10Y SGD IRS) has narrowed to 46bps. This trade could see a more favourable risk reward if the spread narrows towards 30-35bps. We see scope for it to re-widen towards 60bps over the medium term.
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