SGD rates: Time to grab yield

SGSs look attractive compared to AAA-rated peers.
Eugene Leow03 Jun 2019
Photo credit: AFP Photo

After a sustained period of underperformance, Singapore government securities (SGSs) look very attractive compared to peers. Tight SGD liquidity that came about on the back of mismatches in issuances/maturities and a sustained period where the Monetary Authority of Singapore (MAS) is withdrawing liquidity (via bills and swaps) were the two key reasons behind why SGD funding costs have stayed elevated (see here). It probably does not help that the trade war has dented sentiment, driving the S$NEER lower and the USD/SGD higher. Persistent worries about USD strength have also eroded the investors’ interest in taking on local currency debt (including SGSs) on an unhedged basis. To be sure, many of the forces driving SGD rates underperformance are still applicable. However, there are a couple of factors that suggests that this development could be ending.

Firstly, the issuance/maturity profile should tilt in favour of longer-term SGSs in the coming months. Notably, the SGD rates space has had trouble digesting the 10Y, 15Y and 30Y auctions over the past few months. In the past two months, competition from the Land Transport Authority of Singapore (HDB) and Housing Development Board (HDB), which cumulatively raised SGD 2.1bn) have added to the tightness. Going forward, the calendar becomes lighter with 20Y and 10Y auctions scheduled for end-June and end-August respectively. SGD rates should also get some respite with SGD 8.7bn worth of SGSs maturing over the weekend.

Secondly, we think that the global grab for yield will spill over into Singapore. Slowing global growth and increasing trade war risks have dragged 10Y US yields lower by more than 100bps to 2.12% from its peak last year. Across the developed markets, sentiment is similarly weak with yields in Germany and Australia pushing record lows. The total stock of negative yielding debt has ballooned to over USD 11tn and this will prompt DM investors (especially Europeans) to look towards higher yielding assets.

Within the AAA space (by all three major rating agencies), Singapore has the highest 10Y yield (2.09%). If we throw the US and Japan into the mix, Singapore ranks a close second (10Y US stands at 2.12% at the time of writing). SGSs look cheap on other technical measures too. Notably SGS yields are trading higher than swap rates across much of the curve while SGS and UST yields have practically converged from the 2Y tenor onwards. The front of the SGS curve is also much steeper than the US curve where the market is already pricing in aggressive Fed cuts.

The implications of a low-yielding world are clear. SGSs now look very attractive in level terms and compared to peers. We are not convinced that the 150bps premium that 10Y SGS holds over the average of AAA-rated peers is warranted. Going forward, SGSs have scope to do well in relative and absolute terms.

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Eugene Leow

Rates Strategist - G3 & Asia

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