SGD rates: Flush liquidity
The outlook for SGD rates is likely to be benign, with pockets of relative value plays through 2020. There are a couple of assumptions that we are holding. Firstly, we see the Fed on pause this year with the hurdle to move in either direction set relatively high. With the market seeing an asymmetrical risk towards easing, we think that this reflects a more cautious positioning (worries on duration), rather than an outright bet that the Fed will cut. Secondly, there is a good chance that Monetary Authority of Singapore (MAS) will also stand pat after easing policy in 2019. Taken together, we think that monetary policy will be playing a more muted role in driving SGD interest rates this year.
SGD interest rates have outperformed their USD counterparts over the past few months. While we think that SGD rates can stay low in a benign environment, we are cognizant that a large part of move is probably already behind us. Notably, the spread of 2Y SGD IRS over 2Y USD IRS is now at -23bps, compared to 13bps in early September. Accordingly, we think that the market is already reflecting the better global manufacturing outlook and a thaw in China-US trade tensions.
There will be opportunities when SGD liquidity gets more flush (more than what is being experienced due to current USD weakness) due to idiosyncratic factors. We think that the upcoming budget could be more generous than previous years as the government takes a fiscal tilt towards supporting the economy. For SGD rates, much would depend on the Net Investment Income/Returns contribution (NIRC) for 2020. Over the past few years, the amount of NIRC has been steadily increasing and is estimated to be around SGD 17bn (3.4% of GDP) for FY 2019. For FY 2020, the figure can be higher and should translate into an additional liquidity boost (probably staggered across several periods) later this year.
Better SGD liquidity can be expressed by SGS-swap spreads. The issuance calendar is heavily tilted towards the longer tenors (10Y and 30Y announcements due on January 21 and February 19 respectively). There is an absence of issuances for the 5Y tenor in the first five months of the year. Moreover, optional mini auctions are only scheduled for June and August. This suggests that 5Y SGS-swap spread offers the best risk-to-reward in the near term. Current SGS-swap spreads are wide ahead of upcoming longer-term issuances as bonds underperformed. However, this should reverse once the long-tenor SGS issuances are cleared in 1Q.
Longer-tenor SGS outperformance versus US Treasuries may be more interesting in 2H20. Aside from a lighter SGS longer-tenor issuance schedule, the maturity profile of SGSs (and comparables) is more favourable. Notably, there are two sizable SGS maturities, SGD 5.5bn and 8.0bn in July and September respectively. Amongst comparables (we screen only the government-linked entities, no private sector), only the SGD 1.2bn HDB bond (maturing November) stands out. Timing wise, we think that US yields may start to push meaningfully higher only in 2H. The mix of fiscal fears, US ultra-long issuances and a period of stable global growth may just be the trigger for longer-term USD rates underperformance. Under these conditions, we think that SGSs and SGD rates offer greater stability.
To read the full report, click here to Download the PDF.
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. 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.
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. 09.03.1.64.96422