SGD Rates: Understanding the SORA spike
The spike in SORA in the last two days of September sparked consternation amongst market participants. SORA touched at all-time high of 4.39% last Friday, topping the previous record of 3.89% last Thursday. Before this period, the high was set at 3.78% in 2006, when the Fed hiked to a terminal rate of 5.25%. There are a few points to note. First, as the Monetary Authority of Singapore (MAS) does not run an interest rates policy, SORA tends to be a lot more volatile compared to SOFR (which essentially has to track the Fed funds rate). Second, there is seasonaility involved that tends to drive SORA higher towards the end of each month. Third, The t-bill and SSB issuances might have worsened liquidity conditions. Fourth, there are stresses in global markets that are impacting the USDSGD. As the USDSGD rises, there may be some upward pressures on SORA as seen in two episodes in May and June this year.
The upshot is that SORA figures should be smoothed to get a better sense of the underlying. We think that SORA figures around 2.75% (registered before the recent spike) might be a better reflection of the underlying trend when the Fed funds rate is at 3.25%. it might take a few days before SORA settles lower. The speed and extent might also well depend on the level of market stress. Given heightened uncertainties on the global economic front, a persistent drift higher in the USDSGD could keep SORA elevated versus SOFR for some time. We would highlight that short-tenor SOFR OIS are probably more vulnerable to squeezes higher.
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