SGD WEEKLY : Through the Looking Glass and the 2016 Auctions
Some crazy short end moves following last week’s SOR and SIBOR divergence as we had pointed out : “Sibor rarely exceeds SOR given the opportunity for arbitrage by parties who would stripe out the cost of funds from the forwards which suggests that the SOR move is either temporary i.e. led by the sharp drop in the spot USDSGD or that Sibor could be in for a steep decline in the medium term should emerging markets continue to calm down.”
The 3M SOR rebounded strongly on the week rising 0.3% to overtake SIBOR which led to a massive curve flattening as the short end rates played higher along with the USDSGD. Singapore interest rates continue to remain one of the highest in developed markets, only losing out to Australia and New Zealand.
Long end bonds continue to see demand despite having rallied over 28 bp in the past 4 weeks for the 10Y although the best performer would be the 5Y which has fallen 37 bp for the same period, halving the 70 bp gap with US treasuries of the same tenor to just 37 bp now.
The big news for the week would be the announcement of the 2016 bond issuance calendar which is a heavy one, given that maturities next year is double that of 2015.
Looking back on the year, bond investors have reason to rejoice because bonds from the last 4 auctions have outperformed in general and the yield curve has favoured long end bond investors in the past 12 months.
Our vision for 2015 is materialising as we speak with the retail investors taking a keener interest in the bond markets this year with the launch of the Singapore Savings Bonds and we can only expect retail participation to increase in the future with retail bonds to hit the street next year.
“My wish for 2015 is for the retail market to take a keener interest in the government bond market because it is really pretty accessible now, being quoted on the stock exchange (on much wider prices) and private bankers cannot really add too much margins on them (or at all) because the price levels are very transparent.” https://tradehaven.net/through-the-looking-glass-sgs-auction-calendar-2015-and-mini-auction-update/
2015 has seen 5.2 bio worth of new bonds hit the street compared to the 3.4 bio in 2014 and 3.9 bio in 2013 and market indigestion, combined with a weak currency story, has given the year some interesting twists even as it ends on a high note and a potentially jumbo HDB SGD 1.2 bio 5 year auction after the stat board became the first in Singapore to obtain a Aaa rating from Moody’s. This shall be pay-back time for HDB after 5 long years of enduring widening credit spreads and paying wider spreads than for example, Capitamall and CDL, for their bonds at one point. Who would have foreseen this last year, :).
“SINGAPORE, Oct 22 (IFR) – Housing & Development Board has finally emerged to invite banks to bid for its first offering of bonds for the year.
Having obtained the highest rating of AAA from Moody’s on October 15, the statutory board is primed to sell five-year notes of up to S$1.2bn (US$861m). The target issue size will be S$800m with a S$400m greenshoe option.
HDB is Singapore’s first statutory board to receive a rating, which is crucially to expand its investor base. The rating makes a vital difference for banks’ asset liability management desks.”
Taking a look at 2016’s offerings.
- 3 more auctions than 2015.
- 3 new long end – 10Y, 20Y and 30Y benchmarks, looking more heavy for 2H16 (maturities only start in April 2016).
- Light on the short end papers that are important for banks’ investment books which is either a sign that they would like to guide short end yields lower or they expect that banks’ needs/appetites are unlikely to improve perhaps due to shrinking balance sheets ? (Or more HDB bonds to fill up that space ?)
- The long end supply would be a relief to those insurance funds that are desperately seeking the tenors at miserable yield levels.
It does look like market activity will be brisk in 2016 with those extra auctions and other bond market initiatives to come forth even if it is too early to conclude that 2016 will be bond year for Singapore (because Singapore bonds rally in reverse to the rest of the world ?).
The USDSGD is displaying much of that indecision as well, closing the week under 1.40 and within the trading range of last week despite that sharp spike in SOR which makes it opportune to test the market’s long positioning in the days ahead for a possible break of its recent 1.3728 lows.