20171127-大华银行-Rates_Insights_7页_298kb

Summary of Rates Insights - 27 November 2017

Core Content

This document provides a detailed analysis of interest rate movements and market conditions in Singapore and other Asian currencies, with a focus on short-term and long-term trends, yield changes, and market biases. It outlines the performance of various benchmarks, the implications of monetary policy, and the outlook for future market behavior.

Market Summary

• 3M SOR decreased by -4bps, showing a downward trend.
• 3M SIBOR decreased by -0.1bps, while 3M LIBOR increased by 2.7bps.
• The 1M vs. 6M SOR curve steepened by 1bps, and the 3M SOR discount to SIBOR increased by -3.9bps.
• 10Y SG IRS yield decreased by -1.1bps, which was less than 1 standard deviation from historical changes.
• The 5Y vs. 30Y SG IRS curve flattened by -3.1bps, closing at 0.77%.

Domestic Yields Diverge

• The 12W tenor MAS bills auctioned at 1.31%, a new year-to-date high.
• 3M SOR has fallen close to its month-to-date lows, around 1.00%.
• The negative basis between MAS bills and SOR has persisted since mid-2017, attributed to domestic currency strength and a USD funding premium.
• MAS may allow SGD to appreciate and the FED to continue tightening in 2018, which could maintain the negative basis.
• A SGD short squeeze could occur if MAS intervenes to mean revert the basis.

FED Tightening Not Expected to Rock the Boat

• Market participants expect the status quo to prevail indefinitely, as seen in TED spreads, Libor vs. OIS spreads, and USD X-currency basis.
• Eurodollar futures and low VIX index indicate low volatility expectations.
• Central banks have been successful in suppressing volatility, which may lead to mean reversion frustrations.

Short Term View

• 3M SOR is expected to consolidate around 1.00%, unless new positive catalysts for SGD emerge.
• US Libor is anticipated to continue its upward trend, with one more hike in 2017 (December) expected.
• Unintended USD funding stress due to the FED's balance sheet reduction could pose upside risk.
• 10Y UST is expected to trade within a range of 2.30% to 2.45% in the coming week.
• 10Y SGS is expected to trade within 2.04% to 2.19%.

Bonds and Interest Rate Swaps

• Asset Swap Spreads (ASW) for SGS bonds show a tightening bias, especially for 15Y.
• 15Y ASW is currently at -7bps, and could potentially cheapen further if Primary Dealers increase position adjustments.
• Outstanding demand from real money accounts could trigger a short squeeze, ending the cheapening trend.
• 5Y SGS is expected to end 2017 between 1.80% and 1.90%, with a cautious directional view towards higher yields.

Notes on 2017 SGS Cash Flows

• March and September are high coupon months, with SGD 737mio in coupon payments.
• May and November are dry months for SGS coupons.
• Maturities in 2018 total SGD 13.5bio, with SGD 6.7bio in April and SGD 6.8bio in September.

Rates Biases

Benchmark Levels

Key Takeaways

• The Singapore rates market remains range bound, with 3M SOR trending lower and SG IRS showing a flattening curve.
• USD continues to show a tightening trend in Libor and bond curves, while SGD and MYR are experiencing different dynamics.
• FED tightening is expected to continue, but market expectations suggest a neutral stance.
• SGS is seen as undervalued relative to UST, with bond swap spreads tightening and relative value bias favoring SGS over UST.
• 10Y SGS is expected to underperform against UST and SG IRS, with a positive bias on SGS bond swap spreads.
• Liquidity conditions and risk appetites are key factors influencing the cheapening of long-dated SGS.