20180531-大华银行-Money_Markets__Seasonal_Upside_Pressure_On_Rates_5页_314kb

Singapore Rates Monthly Summary

Core Content

This report provides an analysis of Singapore's money market rates and related financial indicators for May 2018, with a focus on the implications of the U.S. Federal Reserve's (FED) policy decisions and the impact of seasonal liquidity trends on domestic markets.

Main Points

1. Money Market Rates and Liquidity Conditions

• Domestic money market rates increased in May, and the yield curve flattened.
• US Libors fell in the 3M and 6M tenors, but rose in the 1M as June's FED hike was priced in.
• The average SGD NEER basket weakened by 0.13%, which partially offset the effect of lower Libors on Singapore Overnight Rate (SOR) rates.
• Liquidity conditions are expected to remain tight in June, with the average overnight interbank rate rising to 0.75% in May from 0.45% in April.
• Seasonal patterns suggest that June is likely to see the strongest upward pressure on money market rates compared to other months in the past 5 and 10 years.

2. MAS Bills Auctions

• Supply of MAS bills decreased in May for 12W and 24W tenors, while 4W bills saw an increase.
• Bid-to-cover ratios declined across all tenors, with the 4W tenor showing the largest drop, from nearly 3 times in April to under 2 times in May.
• Yield cuts for MAS bills increased in May, with 4W, 12W, and 24W bills recording gains of 20bps, 8bps, and 5bps respectively.
• The spread between 4W and 24W yield cuts narrowed to 6bps, the tightest since December 2017.
• The MAS bills curve showed signs of flattening, mirroring the SOR curve, indicating gradual tightening of domestic liquidity.

3. US FED Expectations and Libors

• Fed funds futures implied a 100% chance of a 25bps hike in June, with the next expected tightening move in September.
• The implied probability of more than 3 FED hikes in 2018 was significantly reduced in May due to the FOMC minutes showing tolerance for short-term inflation overshooting.
• Risk aversion and safe haven flows from Italian political uncertainty further impacted FED rate expectations.
• The 3M LIBOR vs. OIS spreads narrowed in May, reflecting a moderation in USD liquidity premiums.
• OIS spreads bottomed out in mid-May and are expected to re-price higher in June, influenced by seasonal liquidity conservation and increased demand for funds.

Key Information

• Seasonal liquidity trends suggest that June will likely see tighter conditions, potentially leading to further flattening or inversion of the money market curve.
• MAS bills supply may decline in June due to support from FED rate hikes, EM risk premiums, and seasonal liquidity pressures.
• FED policy remains on track for a tightening cycle, with a focus on the 25bps hike in June and potential moves in September.
• Market expectations for the end of year FED funds rate are being tested, with a split between 3 and 4 hikes, depending on the re-pricing of recession probabilities.

Supporting Visuals

• Change in Money Market Rates (30 Apr 18 to 30 May 18): Illustrates the firming of domestic rates and flattening of the curve.
• SGD NEER And Average Sor Rate: Shows the weakening of the SGD NEER basket and its impact on SOR rates.
• Average MAS Bills Auction Supply: Highlights the decline in supply for 12W and 24W bills and the increase in 4W bills.
• Average MAS Bills Auction Bid To Cover Ratios: Demonstrates the decline in demand across all tenors.
• Average MAS Bills Auction Yield Cut: Reflects the increase in yield cuts and narrowing of the spread between 4W and 24W bills.
• Implied Probability For >3 FED Hikes In 2018: Shows the significant drop in probability following the FOMC minutes.
• 4Q 2018 FED Funds - Analyst Distribution: Reflects the market's expectation of a 3 hike scenario.
• 3M US LOIS And 3M FRAOIS IMM2: Indicates the narrowing of USD liquidity premiums.
• Scan the QR Code for a list of all our reports: Provides access to additional reports and publications.

Disclaimer

This publication is for informational purposes only and should not be used as a basis for investment decisions. It does not constitute investment advice or a recommendation to buy or sell any securities. The views expressed are those of the authors and do not necessarily reflect the views of UOB Group. The information is based on publicly available data and may change with new developments. UOB Group may have different views in other reports and may hold positions in the securities discussed.