Investors can tap on opportunities from the sell-off in Singapore Government Securities (SGS) that took place on Jan 20, says DBS Bank Strategist Eugene Low.
He believes that the move is likely a “pre-positioning ahead of the 30-year announcement,” that is expected to be $2.1 billion.
“This probably reflects willingness on the part of the authorities to fulfil demand from investors after getting the issuance limit for government securities raised two weeks ago,” Leow mulls in a Jan 21 note.
He expects the net issuance of SGS to come in between $12 billion and $14 billion this year.
Meanwhile, Leow notes that the ultra-long tenor SGS – which are 20 years and 30 years – look relatively expensive compared to their US Treasury equivalents.
“We think that SGS outperformance can be better expressed in the 10 year to 15 year region where the discount to US yields has become smaller,” he explains, adding that the 15 year SGS is the most attractive from an SGS-swap perspective.
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Leow believes that foreign exchange dynamics will stay favourable and dominant in the movement of the long-term tenor SGS instruments. This is as the Singapore Dollar (SGD) tends to hold up relatively well in periods of economic uncertainty, thereby putting downward pressure on the SGD vis-à-vis US Dollar rates across all tenors.
For now, Leow says that events such as the dissemination of coronavirus vaccines around the world could narrow the SGS-US Treasury yield spreads.
However, hurdles in achieving this come from the 10 year and 15 year auctions which are scheduled for March and April, he adds.
By contrast, Leow says that the front of the SGS curve – which moves out to the 5-year tenor – has stayed attractive, thereby allowing USD-based investors to “get additional pickup from an after-swap perspective”. This in turn commands a consistent premium over the US Treasury yield.
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“This is largely due to the relative liquidity differences between SGD and USD,” Leow explains. While the US Federal reserve is running Quantitative Easing, it has opted not to sterilize the resultant increase in liquidity.
Instead, “there are expectation that the USD1.6 trillion Treasury cash balance may start to get [run’ down to support the government’s additional fiscal spending, rendering USD liquidtiy even more flush,” observes Leow.
Monetary Authority of Singapore (MAS) has adopted a different approach by soaking up liquidity, stabilizing 3M MAS bills at around 0.35%.
Leow expects the central bank’s stance on liquidity “to stay broadly unchanged through our forecast horizon, keeping short-term SGD rates high relative to their USD equivalents”.
