Considerations for SGD interest rates are more complex than USD rates as there are additional layers stemming from local factors. In particular, market participants have been trying to gauge the passthrough from Fed hikes unto the SORA. Economically, there is not much difference in how we think about the passthrough now (SOFR to SORA) and previously (LIBOR to SIBOR and SOR). In times of economic expansion and where twin tightening (Fed and the MAS) is taking place, we would expect the upward trajectory in SGD rates to broadly lag that of USD rates. We are in such a scenario with the Fed having hiked by 75bps this year and signalled another 100bps to come in the immediate two FOMC meetings. The MAS has also tightened thrice since October last year. With April’s CPI (headline at 5.4% YoY and core at 3.3% YoY) still uncomfortably high, the odds are that the MAS would tighten a fourth time in October this year.
However, market participants who had anticipated a rapid discount to appear in SORA relative to SOR had been disappointed. Taking the SORA and SOFR fixings from 5 May (post FOMC) to now, the SORA has exhibited an average daily premium of about 14bps. We took an average here to smooth out fluctuations as the SORA tends to be more volatile than the SOFR. There are a few considerations. First, the absolute level of rates matter. When we look at the previous two Fed hike cycles (2004-2006 and 2015-2018), the spread between SGD and USD rates tend to widen out after the Fed has delivered several rate hikes. This also means that in the initial part of the hiking cycle, the passthrough could be considerable. However, this passthrough tends to fall with the relative positions of SGD and USD rates falling more in line with interest rates parity when the Fed hike cycle gets more advanced. Second, market volatility and weak sentiment have impacted the USDSGD and consequently have resulted in a pause in SGD rates outperformance as we had highlighted.
The upshot to this is that SGD outperformance is still a key theme but market participants need to realise that this would take time to play out. There might also be selected tenors that are more attractive than others as USD and SGD rates get buffeted by multiple factors in these volatile times.
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