Singapore Rates 2012 Into 2013 – A Jack In A Box

2012 is behind us and Singapore has cemented her spot as a safe haven amongst the global financial centres.

• Historic lows in SGS yields :  5Y to 30Y.
• Historic lows in the > 7Y irs.
• Inaugural 30Y SGS introduced.
• Changes in the t-bill market – MAS 84 day bills to replace 3M SGS t-bills.
• Record corporate bond issuance.
• Establishment of Basis Swap Facility for Offshore Corporates Issuing Onshore.[Para 40   http://www.mas.gov.sg/News-and-Publications/Monetary-Policy-Statements-and-Speeches/2012/Keynote-address-by-Mr-Ravi-Menon-MD-MAS-at-IMAS.aspx  ]
• Establishment of Securities Borrowing and Lending Facility.[Para 41 http://www.mas.gov.sg/News-and-Publications/Monetary-Policy-Statements-and-Speeches/2012/Keynote-address-by-Mr-Ravi-Menon-MD-MAS-at-IMAS.aspx  ]

Looking back, the feeling is that of a “lost” trading year. The market could be said to have closed since sometime in October, after the MPS and very little transpired in the way of market development since June.

Volumes have slumped with fewer active market participants while trading ranges have compressed on global central bank intervention efforts leaving little on the table for trading.

The Year in Numbers

SGS

Table 1 – SGS Quarterly Performance Summary

**auction cut off yield

The rally came in hard and fierce in the first half of the year, tipping yields off the table to hit their historic lows in Jul for the >10Y bonds when UST yields bottomed. The historic lows in the 5Y and 10Y SGS struck in Dec 2012 as the market thinned out which made it easy for a light buy flows to drive yields lower.

Best performing bond of the year is the Sep 2018 issue which rallied 60 bp, following its phenomenal rally of 122 bp in 2011 where it was just behind Jan 2019’s 123 bp.

Best performing bond in price terms would be the 30Y SGS which fell 40 bp in yield since its auction in March and is priced 7 cts higher at 107.00 mid.

Worst performing bond would be the Feb 2014 which barely rallied after its auction where it came at 0.30% and had little room to outperform.

Volumes floundered in 2H12 particularly in the short end as hopes of further SGD strength diminished thus reducing speculative inflows that would normally be parked in short term bonds. Bonds also faced competition from the new SGS 6M tbill which yielded close to SGS up to 3Y.

Table 2 – SGS Comparison 2011 & 2012

Trading ranges halved from 2011 on a sharp drop in trading interest given policy predictability and a lack of supply made it impossible to trade against the market.

SGD 28.4 bio worth of new govis were introduced with SGD 24.4 bio maturing. The average duration of the curve rose from 5.799 years in end 2011 to 6.138 years end 2012, thanks to the new 30Y bond. Every auction was a success, with some more successful than others, namely the 30Y SGS introduced in Mar this year.

IRS

Interest rate swaps saw some big one day moves that is not apparent in market data. For instance, the 5Y irs fell over 20 bp on 1 June from 1.05% to 0.83% on pure market capitulation along with the basis and another case when rates had a 20 day down move in July which could only be blamed on a cumulation of a one dimensional market and poor liquidity which led to the current absence of trading interest.

The July run saw historic lows in the >5Y irs after which volumes virtually dried up and trading slowed in 3Q and 4Q.

Table 4 – IRS Table

2012 saw a plethora of corporate bond issuances, most of them coming from offshore issuers which had to be swapped into USD. Whilst MAS has established a new basis swap facility to absorb the excess SGD, the implication was that the market would still be sitting paid rates and paid in the basis swaps in the absence of any opposing flows.

The market was highly skewed, with most banks at the mercy of flows. The final result was that trading interest withdrew to an almost standstill in the 4^th quarter and conditions became rather illiquid and susceptible to the whims of a handful of players.

Basis Swaps 

Basis swaps had a volatile first quarter with the market unable to grapple with the chunky flows going through which caused very gappy trading and causing losses on most parties except for the stalwarts with deep pockets.

Thus, data in the table below cannot be understood just at first glance.

Table 5 – Basis Swaps

	3-Jan-12	28-Mar-12	29-Jun-12	28-Sep-12	17-Dec-12	Year Change
1Y BASIS	-11.5	-5	-6.5	-3	-5.5	6
2Y BASIS	-28	-10	-12.5	-7	-8.5	19.5
3Y BASIS	-32	-17.5	-24	-12.5	-12.5	19.5
5Y BASIS	-54	-38.5	-37	-25.25	-24	30
10Y BASIS	-51.5	-46	-44.5	-27.5	-28	23.5

Basis swaps found support where IRS could not and managed to tighten against the odds. Part of the reason was that patchy flows often took the market by surprise and the moves in the basis swaps have been quite violent.

Payers emerged from carry trades which managed to take some pressure off the short end. The market was also buoyed by the MAS basis facility to provide a backstop for basis prices up to 5 years.

As USDSGD ground lower, the market also saw a lot of long dated swaps trade unwinds.

USD/SGD

The SGD NEER opened 2012 approximately 165 bp below the band and has been holding 170-190 bp above the band since the Oct 2012 MPS.

Table 6 – SGD NEER

The 2 Monetary Policy Statements reiterates the firm stance against inflation noting a concession towards sustainable growth.

Table 7 – Monetary Policy Statements since Oct 2009

	MONETARY POLICY STATEMENT	SLOPE	BAND	INFLATION	COMMENTS
12/10/2012	Modest and Gradual Appreciation	No Change	No Change	Above 4.5% for 2012. To ease to 3.5-3.5% in 2013.	Vigilant in assessing external  economic and financial developments.
13/4/2012	Modest and Gradual Appreciation	Increase Slope	No Change	Increase from 2.5-3.5% to 3.5-4.5% in 2012.	Anchor inflation expectations, medium term price stability.
14/10/2011	Modest and Gradual Appreciation	Reduce Slope	No Change		Technical recession averted.
14/4/2011	Re centre to unspecified level below prevailing NEER	No Change	No Change	Increase expectation  to come at higher side of 3-4%.	High economic activity but growth momentum to moderate
14/10/2010	Modest and Gradual Appreciation	Increase Slope	Widened	Expect inflation to rise to 4% before moderating in 2011	Continued economic growth but at a slower pace.
14/4/2010	Recentre to prevailing NEER. Modest and gradual appreciation	No Change	No Change	Higher inflation expectation to 2.5-3.5% from 2-3% forecast.	Firm recovery expected.
12/10/2009	Maintan Zero Appreciation	No Change	No Change	Inflation remain 0% and to increase in 2010 to 1-2%.	Weakness and uncertainties in the global environment.

Corporate Bonds

SGD 31.174 bio versus 2011 SGD 21.299 bio and 2010 SGD 24,679, produced 45 benchmark issues.

Over SGD 5 bio in perpetual securities issued in 2012 alone, accounting for >70% of total perps in the marketplace.

Outlook for 2013 : More of the Same Or  Breakout ?

Economy

Latest Oct Macroeconomic Survey

FORECASTS	JUN	SEP	DEC
2012 GDP	3.0%	2.4%	1.5%
2012 CPI	4.2%	4.4%	4.7%
2013 GDP		3.9%	2.7%
2013 CPI		3.2%	3.8%
2013 CORE CPI		2.2%	2.2%

The future does not look too bright or promising. Singapore is skirting the edge of a mild recession while tackling home grown inflation.

The market has ground almost to a halt in the last quarter and charts are starting to resemble the heart beat of a dying patient.

2013 could be the year it tips and the boat keels over and Singapore rates will break out of their wedges or continue on its insipid flatliner routine.

Economy

There are many reasons to expect some volatility from the global uncertainties and local factors.

1. Singapore CPI to ease off its 2012 highs

2. Global contagion may finally arrive on the sheltered shores of Singapore – slower growth

These invariably lead to uncertainty and monetary policy dilemma.

Monetary Policy Dilemma

Would expect policy makers to have a harder time all around the world, balancing their rates for growth vs inflation like in Singapore’s case. Domestic inflation continues to be a problem driven by internal factors such as labour costs.

Global confusion is also bound to arise with different central banks going off tangent, Fed targeting unemployment and the BoJ targeting inflation.

Local Markets Trends :

• Arrival of Dodd Frank and Basel 3 rulings will impact market liquidity going ahead.
• Expecting more local measures to be introduced which will cause disruption to the derivatives market
• More issuances expected in the high grade sector as reserve diversification continues to dominate global flows
• Dual currency IPO listings – will probably be attempted again.

USD/SGD

Unlikely to see recentres in the SGD NEER given the slow patch the economy is heading into. Market interest likely to be dominated by M&A and corporate flows, as well as reserve diversifications.

Some houses still calling for a new low but my view will stand that the downside is supported. Expect topside 1.26/1.28 to be tested before MPC.

Auction Calendar

Heavy maturities in 2Q will keep prices in check.

The worry is that SGS is heading into 2013 on historic low yields for most of the issues. The thin supply will only create an artificial rally which will only make an exaggerated correction in time.

High premium bonds will be at risk, such as the Sep 2018 which has been the outperformer for the past 2 years running and is trading at a 19 cts premium.

New developments in the market with the MAS bills and now with MAS petitioning to issue other securities, will have players on their toes.

See demand for SGS going strong into 2013 but price gains will be capped even though SGS do deserve negative yields for all that they are worth.

IRS

The macro picture for rates is a cloudy one into our 5^th anniversary of ZIRP (Zero Interest Rate Policy) in the US.

Market appears positioned very lightly going into 2013. The correlation between SOR and swaps has increased in the past 3 months and the market is likely to continue to trade to the tune of the fwds which are in turn, trading to the tune of daily MAS intervention levels.

Another major determinant will be the asset swaps for new corporate issuances which will come out in force.

Headlines of the SNB setting up shop in Singapore will encourage high grade issuances in the short tenors for their investment needs. This will in turn keep a cap on the short end irs and the basis swaps. Thus a case for further steepening could be made.

The Dodd Frank Act is likely to impact market participants, majorly constricting interbank liquidity. The move to transfer OTC trading to the exchanges will start in force in 2013 which will only mean more volatility in the days ahead.

Corporate Bonds

Basel 3 rules slowly trickling in. Will not expect 2013 to be a bountiful year for issuance as the sub debt market is likely to dry up. High yielders will continue to see supply as the retail market continues to in its search for yield and interest rates show signs of rearing higher.

In addition, reserves diversifications will fuel demand for high grade issues.

Will be hard pressed to make a call on further rally in prices as Basel 3 will crimp banks’ abilities to hold stock. The problems will arise when investors try to switch out of old issues into new ones especially in the perp space, in a rising interest rate scenario.

The Dodd Frank Act will also likely impact the business but given that most of the rules are still hanging in the air for securities, nothing major should be expected in 1H13.

Conclusion

Uncertainties abound in the months ahead and the winning trade may not be the same QE trades that we have been hanging on to for the past 4 years.

Most policy actions this year are unprecedented and highly experimental. Thus results (and repercussions) can only be known in the months of 2013 ahead. Like a Jack in a box, we shall wait for the surprises to spring.

QUOTES FOR POSTERITY

“It will be uncertain.” HF Manager

“I see a new growth cycle ever since 2008 credit meltdown. This year marks the inflexion point.” Treasury Manager

“The increasingly murky line between smart investment choices and risky trading decisions will continue to stay grey as reduced volatility makes risky trades a “no-brainer” until the seemingly stable situation evolves into a chaotic mayhem. Expect to see increased scrutiny and analysis in various asset classes, where the new horizon is more a macro trade than a micro trade.

The ill effects of political jostling will filter down, making the protection of the interests of corporates or the masses a tough choice. Increased regulation and surveilance of the system’s integrity will bring about a paradigm shift at the expense of lower liquidity, volume and much unhappiness.” Credit Trader

“2013 . the years of the singles. Single digit returns that is… massive 2012 returns in credit, rates, and equity… single digit returns at best for 2013 !” Credit Portfolio Manager
“2013.  The year when snaky policy makers will continue with their sneaky action to snooker the market.”  Snarky Credit Portfolio Manager