SGS a beneficiary in a low yield world; USD defies plunge in US bond yields

SGS benefitting from low rate environment. USD stays firm.
Eugene Leow, Philip Wee16 Aug 2019
    Photo credit: AFP Photo

    Rates: SGS benefitting from low rates                                 
    We have held the view for long that Singapore government securities (SGSs) would be a beneficiary in this low yield environment. Indeed, the long end of the SGS curve has been the major beneficiary with 30Y yields down by over 70bps (to 1.87%, an all-time low) since June. However, the short-end of the curve was kept elevated due to still-tight liquidity and increasing speculation of Monetary Authority of Singapore (MAS) easing in October. Conditions supporting SGSs are still firmly in place. Flight to safety in amidst heightened economic uncertainties at a time when yield (in the DM world) is scarce suggest that investors have limited alternatives. Moreover, SGSs still offer one of the highest yields (comparable to the US) in the developed world.

    With US yields still displaying downside momentum (10Y yields briefly breached 1.50% yesterday), SGS yields will inevitably follow. Moreover, the issuance calendar is light. Other than the upcoming 10Y auction (auction date 28th August), there are only two other scheduled ones (2Y tenor in September and 7Y tenor in October) to contend with. We think that the 10Y and 20Y tenors should see strong demand. With the 10Y/30Y spread narrowing by almost 40bps in less than three months, 10Y now looks relatively cheap compared to the 30Y. Amid tight liquidity, bond-swap spreads are inverted across multiple tenors. There may be scope for the SGS-swap spread to narrow (turn less negative) in the 5Y and 20Y segments where the spreads look wide.   
    FX: DXY is “Fed Up” and paying more attention to ECB
    Markets to consolidate ahead of the Fed’s Jackson Hole Conference on August 23. The US dollar index (DXY) has defied falling US bond yields and returned to the year’s high. The US 30Y bond yield has plunged below the Fed’s 2% inflation target and the 2.25% Fed Funds Rate. St Louis Fed President James Bullard, the lead dove in the FOMC, warned that the recent market sell-off was overdone and did not necessarily imply a Fed cut at the next FOMC meeting on September 19. Bullard did not subscribe to the US recession fears fuelled by an inverted US yield curve, citing reasonable growth and a sound labour market.

    The European Central Bank (ECB) reminded markets that it is important to pay attention to the rear-view window when driving the DXY. The euro, which accounts for 57.6% of the DXY’s weights, fell back towards the year’s low around 1.11. ECB member Olli Rehn flagged a large stimulus package including “substantial and sufficient” bond purchases is likely to accompany the rate cut expected at the next governing council meeting on September 12. Putting Fed-ECB policies in context, US growth risks pale against the recession risks in some of Europe’s largest economies (Germany, Italy and the UK) and the looming threat of a no-deal Brexit on October 31.

    Eugene Leow

    Rates Strategist - G3 & Asia


    Philip Wee

    FX Strategist - G3 & Asia


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