SGD Rates: Two ideas to navigate rising US yields


SORA and SINGA
Eugene Leow28 Sep 2021
    Photo credit: Unsplash Photo


    With USD rates rising (10Y UST yields closed just shy of 1.5%), SGD rates are also facing upward pressure. We think there are opportunities in SGD rates as investors navigate Fed taper (into eventual rate hikes), upcoming normalization from the Monetary Authority of Singapore (MAS) and assumptions of fair value. Below, we outline a relative value play for SORA OIS and lay out a case for where fair value yield for the inaugural 30Y SINGA bond should be at.

     

    We think that short-dated SORA OIS rates look high relative to their SOFR counterparts. Implied 3M SORA and SOFR suggest that SORA will maintain a meaningful premium over SOFR for the next few years. The spread of SORA over SOFR is priced to be widest (23-26bps) 9-15 months forward before narrowing over an extended period. We are not convinced that would be the case. To be sure, there is about 10bps premium embedded in SORA and that has been the case for the past several quarters. However, we reckon that as Fed hikes kick off, this SORA premium should get eroded, not exacerbated. Barring shocks that trigger Asia FX weakness, US hike cycles tend to coincide with a recovery in the global recovery. Presumably, Fed hikes would start in early 2023 (or even late 2022), if taper concludes around mid-2022 Expectations are building that the Monetary Authority of Singapore (MAS) could well take a similar normalization stance at the upcoming policy meeting in October. In which case, expectations of SGDNEER appreciation should on balance put downward pressure on SGD rates relative to USD rates.  This phenomenon would likely be even more apparent in SOR IRS than SORA OIS. We think paying short-dated SOFR (9M to 2Y) versus receive short-dated SORA is attractive.


     

    We think that 30Y SGS yields (at 1.89%) are close to fair value and we would reasonably assume that the 30Y SINGA auction (today) would see demand at around 1.92% (or a tad higher). Our reasoning is that 30Y US yields, at 1.99%) are already very close to where we think short-term neutral should be at (2-2.25%). Under conditions of Fed and MAS normalization in a global recovery (as laid out above), we should reasonably expect 30Y SGS yields to trade below 30Y UST yields. At a 10bps discount, we do not think that current SGS valuation is demanding. With no more long-dated issuance for the year and strong auction results from the previous 20Y auction, we think that there will be demand especially as yields did take a meaningful leg higher over the past week. The biggest risk lies with uncertainties over the trajectory of 30Y US yields. However, we do see tentative signs that the back of the US curve is flattening out. Upward pressures are likely to be more acute for the bellies (3Y to 7Y) of the SGD and USD curves.   

     

    Eugene Leow

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


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