SGD Rates: Funding mix has become more expensive


Price of borrowing climbed significantly.
Group Research, Eugene Leow05 Oct 2022
    Photo credit: Unsplash Photo


    The price of borrowing SGD has climbed significantly over the past few quarters. In the SGD space, this can be seen in the rise of SORA, closely tracking USD rates as the Fed hikes. However, there are some linkages that are worth exploring as SGD rates reach meaningfully high levels. The starting point for investment stems from the risk-free rate. Arguably, this can be viewed as the recent 6M T-bill which registered a cut-off of 3.32%. Over the course of the year, investors have shifted from TINA (there is no alternative) to TIA (there is an alternative). From an investors perspective (both retail and institutions), short-term instruments now offer yields that are attractive and with negligible credit or duration risks. While official data for retail participation in T bills is not available, we can reasonably assume that interest is strong given the figures seen in the SSB auctions.

    Against this backdrop where the government is offering very attractive returns, banks have to adjust. This can be seen in the shift towards Fixed Deposits (away from Demand Deposits and to a smaller extent, Savings Deposits) over the past few months. The proportion of FD has climbed to 37% of total deposits, compared to just 28% in end-2021. The alternative to FD would be SORA where banks can fund themselves overnight. Unsurprisingly, there are also spill overs as short-term SGD rates moved higher in tandem. These developments represent a much more expensive SGD funding backdrop for banks in general. We also note that liquidity is probably not evenly spaced between institutions and could well exacerbate swings in the SORA.  



    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    eugeneleow@dbs.com
     
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