SGD Rates: Market stresses matter more than MAS tightening
Market stresses have more impact on short-term SGD rates than monetary policy tightening from the MAS. This week, market participants generally expect that MAS to tighten again. We expect the slope to be re-centred higher (see here). Based on where the SGDNEER is estimated to be trading around, we reckon this might be well braced already. For the SORA, we are doubtful that tightening from the MAS would have much impact. The SORA has been elevated and we suspect that this has got to do with upward pressures in the USDSGD amidst elevated volatility in the market. SORA averaged 3.25% thus far in October, some 20bps higher than average SOFR over the same period. The mix of tighter SGD funding conditions (which do not look likely to abate for a while, see here) and USD strength could well keep SORA (and shorter-term OIS) high for some time until a Fed pivot becomes clearer (possibly later this year).
The same dynamics do not apply as much to the longer tenor SGD rates, especially SGS yields. Importantly, there are no more SGS auctions scheduled for the rest of the year (we are awaiting the 2023 issuance calendar due in late October / early November), in contrast to US Treasuries. Second, we think that 10Y SGS yields (and SGS yields in general) appears to be somewhat sticky at current levels (close to 3.5%). This view should hold as long as the Fed terminal estimates do not go significantly above the 4.5-5.0% range. The 10Y yield spread of SGS over UST is around -50bps, compared to around -20bps at the start of September. We think that SGS will probably be more resilient than UST if yields continue to be under upward pressure. However, from a spread basis, we are somewhat neutral at current levels.
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