SGS Rates: 10Y SGS looking attractive again after selloff
3% is decent level to accumulate 10Y SGS
Group Research - Econs, Eugene Leow30 May 2023
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The adjustments across the USD rates space over the past two weeks have also impacted SGD rates. The Singapore Government Securities curve bear flattened, with 2Y and 5Y tenors bearing the brunt of the selloff as market participants factored in a more hawkish Fed. Yield at the front of the SGS curve (6M and below) were hardly changed. Meanwhile, the back of the curve (10Y and beyond) level-shifted higher by around 20bps. At current levels, we think that there is value to be found in SGS, especially in the 10Y tenor. While there are risks that another leg higher in UST yields could push SGS yields up, we note some supportive factors. First, the size of each SGS auction could be smaller. Notably, the recently concluded 5Y reopen (closer in tenor to a 3.5Y tenor) drew a relatively low cut-off yield of 3.19%. Note that this cut-off was registered even as these tenors were trading rich (yields much lower than UST equivalents) before the auction. Second, there is a still a reasonable pickup for USD based investors from asset swapping. This is arguably more applicable for the 10Y tenor rather than the 2Y or 5Y. Third, we think that 3% is a decent level to accumulate 10Y SGS longs. To be sure, there were two periods in the current tightening cycle that 10Y SGS yields pushed decisively above 3% (late-Sep to early Oct, late Feb to early Mar). In both instances, market participants were very worried about a hawkish Fed and this scenario appears to be repeating with perhaps less intensity. There may also be some lingering concerns over the upcoming 10Y SGS auction (announcement date on 20 June), but at these yield levels, we don’t think there will be material cheapening into the auction. Current settings provide an opportunity to add SGS longs on the price dip.   

Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]
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