SGD interest rates – payback time

SGD rates market is finally paying it back. Last December, I wrote here about the risks which lurk behind Singapore living on cheap global funding. In the past few weeks, the ferocious sell-off in SGD rates market drove up the long-end SGS yields by three times the jump in long-end UST yields. For the first time, 10y SGS yield is on par with 10y UST yield in a bear market sell-off. Given Singapore’s safe haven allure, SGD rates usually trade at discount to USD rates where the spread is positively driven by the direction of interest rates – i.e. when rates are falling, the spreads between the SGD and USD rates tighten and when rates are rising, the spreads widen. But this time, we are seeing the spreads tighten when rates are rising – i.e. the SGD rates market has sold off more sharply than the USD rates.

Not even during the 2008 Lehman crisis and the 2011 “911” crisis had long-end SGD interest rates gapped above the USD rates. The only time this ever  happened was during Asia’s own financial crisis in 1998. Then, Asia was over leveraged where Singapore only had a small part to play. Now, as I pointed out last December, Singapore had gone ahead of the pack this time by leveraging up on the cheap global funds while other Asian countries were much more prudent, notably Korea which was one of the worst hit during the 1997/98 crisis.

Frankly, it is hard to see any turning back because firstly, the Fed is unlikely to offer us QE4 and secondly, the MAS does not operate any interest rate tool.

So the best advice is to start hedging your interest rate risk by fixing your loan rates into long tenors. This is also likely to have ramifications on the equities – especially interest rate-sensitive Singapore stocks and the currency. Although there is no event-specific crisis but this correction is inevitable for a market that has gone somewhat overboard to say the least.