What I See For 10Y SGD Yields

While I was away, we had a 10Y SGS auction on 29 Jul which is the last long end paper we are seeing for the year.

The auction saw the lowest demand since 2008 with a bid to cover ratio of 1.58 and was cut off at 2.42%. It is not surprising considering that we just had a 15Y bond auction the month before, a more successful one where the bond rallied from its auction yield of 2.93% to its current yield of 2.8% (about 1.5 cts from the prices of 99.33 to 100.87 today). It looks a little ripe for some profit taking.

My comments on the 15Y SGS auction : https://tradehaven.net/market/weekend-bond-special-new-15y-sgs-auction/

What I found out end last year was that a new monthly correlation had emerged between 10Y bond yields, USDSGD and the STI index.

1. STI with the 10Y bond yield, a negative correlation
2. USDSGD and the 10Y bond yield, a positive correlation


Today we find that this has held true for 2014 whilst the 6M SOR correlation with the USDSGD has withered to nothing.

The stronger correlation change year to date has been the USDSGD and the 10Y SGS.


That picture is diverging right now with yields looking higher after the bond auction and the USDSGD being capped at 1.25.


Following the call for a comeback of the greenback, I would be tempted to say that the 10Y SGS yield is justified and leaning to a propensity to head higher (expecting >2.5%) in the medium term as the USDSGD catches up.

This will be a highly controversial call indeed as USDSGD dips lower as I type and the 10Y yield lower at 2.37%. There is also growing expectation that UST yields will head lower as bonds rallied last night to justify the stock market rally.

But at some time, even in a period of stagnating markets, the yields are just not good enough, noting that the CPF promised yield is 2.5%.

It will be a tug of war but if we look at the bright side,  the risk is even higher for the junk papers in our market.