SGD rates to get a liquidity break; FTSE Russell weighing on MYR
SGD rates are about to get a liquidity break next week when SGD 7bn of SGSs mature on October 1. We had noted that funding was tight in the leadup to the quarter end and felt that liquidity conditions would improve thereafter. Events have played out accordingly with short-term SGD rates displaying signs of tight liquidity. Notably, the spread between the 3M MAS bill and the 3M SOR has widened out close to 30bps. We think that seasonal tightness was also exacerbated by the heavy issuance schedule. The amount of outstanding MAS bills outstanding rose by around SGD 5bn and there were two issuances of SGSs (2Y re-open amounting to SGD 3bn and the 15Y amounting to SGD 0.8bn).
An upcoming liquidity respite, and the fact that the bulk of planned SGS issuances have been done, suggest that SGD rates will hold up well. The SGS calendar is now pretty light, with just the 7Y auction (announcement date on October 21) on the horizon (the optional mini auctions have also been cleared). Dicey risk sentiment (made worse by the recent US political developments) suggests that US Treasuries may be in demand and makes SGS outperformance slightly more difficult. However, this should not detract from the fact the front and belly of the SGS curve is still cheap relative to the UST curve. We think SGSs will hold up well versus USTs and MAS bill cutoffs will shift lower in the coming weeks.
MYR: Lingering risks despite deferred FTSE Russell decision
FTSE Russell has deferred its decision whether it is downgrading Malaysia’s Market Accessibility Level—a decision which could render Malaysian Government Securities (MGS) ineligible for inclusion in the World Government Bond Index (WGBI). As the WGBI is tracked by many fixed income funds, an exclusion will imply significant rebalancing outflows from the MGS market. Estimates of potential outflows range from USD2bn to USD10bn, depending on assumptions of AUM and positioning latitude for funds that deviate from benchmarks.
Bond outflows on such a scale are typically accompanied by average of 3% sell-off in the MYR. But positioning likely became underweight when FTSE announced that Malaysia’s status was under review, so the final exclusion will not be a bolt out of the blue. As such, we think any negative impact on the MYR from index exclusion could be limited to around 1-2% losses. A positive affirmation of Malaysia’s market accessibility by FTSE will trigger MYR strength.
Aside from lingering risks from the index exclusion, we see further upside in USD/MYR. MYR weakness could be accentuated by a combination of softening external demand, and expectations for BNM to stay dovish in the foreseeable future.
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