SGD Rates: Tactical SGS underperformance
10Y SGS might underperform 10Y UST (from a receive perspective) in the coming weeks.Since the start of the year, 10Y SGS yields have largely tracked 10Y UST yields lower amidst a more muted global growth outlook. However, we would note that 10Y SGS yields are still some 70bps lower than comparable UST. In the cycle peak, this spread was closer to 80bps in late December. This spread is now closer to the bottom of the range that has held since late 2011. To recap, 10Y SGS yields tend to be relatively low in periods where economic growth is firm and twin tightening (Fed and MAS) is taking place. Conversely, during times of stress (typically when the Fed is easing and keeping interest rates low), yield drops in SGS tend to lag those of UST. The upcoming US debt ceiling debacle could be an event that triggers SGS underperformance and a repeat of March could take place (where the spread compressed close to 40bps). While the X-date for the US debt issue could be reached as early as 1 June, it is probably more likely that the US might run out of funds in the 2nd week of June (as shown by the kink in the US T bills curve). A period of risk aversion might ensue in the coming weeks. If the debt ceiling gets lifted (base case), the SGS space still has to deal with a 10Y auction on 27th June. In both instances, we see scope for tactical underperformance in 10Y SGS.
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