Curve steepening bias in India; no compelling reason for SGD rates to outperform

Curve steepening in India. Unwilling to chase further SGD rates outperformance.
Radhika Rao, Eugene Leow15 Oct 2019
    Photo credit: AFP Photo

    India rates: Curve steepening bias

    Recent data have pointed to weak growth impulses in India but this is unlikely to prevent a firm headline inflation from lifting 10Y bond yields in today’s trade. As it stands, last week’s fall in 10Y bond yields (following the borrowing calendar and ahead of the new 10Y issuance) had already started to peter out with firm inflation marking a floor. Also note the bounce in UST long-end yields following Fed’s near-term money market measures (see yesterday’s Macro Strategy note).

    Out late Monday, September CPI inflation quickened to 3.99% YoY (DBSf: 3.9%, consensus 3.78%) vs 3.3% month before. Higher food accounted for bulk of the rise, particularly a sharp rise in vegetables (15% YoY vs 7% in Aug) owing to seasonal factors and supply disruptions due to poor weather conditions. Non-food inflation eased, taking the core measure to 4% from August’s 4.2%. The RBI MPC is likely to look past food inflation, which is likely to stay firm over the next couple of months, as supply-driven and transitory. Focusing on the softening in core inflation, we don’t expect the RBI MPC to put the brakes on its rate cutting cycle. WPI inflation weakened to 0.3% YoY as non-food reflect weak pricing power of manufacturers, reinforcing the need for an easy policy. Separately, weakness in industrial activity came to the fore with -1.1% YoY decline, near our estimate, as core industries pointed to a broad deceleration in activity, particularly coal, steel and cement, not boding well for industrial and infrastructure output.

    Generic 10Y bond yields are likely to stay supported above 6.65% while the new 10Y hovers around 6.50%. 2Ys are held down by implied rates pointing to further easing over the next year. Curve steepening bias continues. Divestment plans received a boost following a strong opening to a state-run IPO yesterday. More of these are needed to meet the sizeable non-tax target this year. In the credit space, non-bank names are increasingly tapping offshore credit markets as local costs stay sticky and fund houses pare their exposure. Two names might raise a cumulative USD700mn in the near-term with two others also seeking to raise foreign loans, according to Bloomberg.

    Rates: Less compelling to bet on SGD rates outperformance

    SGD interest rates have outperformed their USD counterparts over the past few weeks. In late September, we flagged out that conditions may turn more favorable for SGD rates (see here). Some of this has played out as the spread between the 2Y SGD and 2Y USD swaps fell to -16bps, from a peak of 13bps in early October. This development is also generally reflected across the other tenors as market participants turned modestly optimistic on China-US trade tensions. Notably, the Monetary Authority of Singapore’s (MAS) decision to flatten the SGD NEER slope did not have any negative impact on SGD interest rates as global events dominate.

    At current levels, we think that this trade has become less compelling. The 5Y SGD-USD spread is now close to the median (-2bps) for the past five years. In that period, this spread has oscillated between -85bps to 115bps. In order to nudge this spread wider (in either direction), a clearer FX impetus in needed. In 2015/2016, USD strength nudged SGD rates above USD rates. Conversely, USD weakness in 2017/2018 pushed SGD rates below USD rates. While a mini trade deal has been agreed (but not signed), there are plenty of opportunities for tensions to flare in the coming few weeks.

    Radhika Rao

    Economist – India, Thailand & Eurozone

    Eugene Leow

    Rates Strategist - G3 & Asia

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