SGD Rates: What level of stress is still embedded?

SGD rates still showing stress.
Eugene Leow16 Nov 2021
    Photo credit: Unsplash Photo

    There is still a considerable amount of stress embedded in SGD rates. One way to proxy stress would be the spread of SORA rates over comparable SOFR rates. In the 2Y tenor, this spread hit 42bps in the first phase of USD rates adjustment in March. When rates calmed down, broadly reflected by a drop in long-term implied volatility in USD rates, this spread fell into the 10-20bps range. Similarly, the recent surge in the front-end of the USD curve caused the 2Y SORA-SOFR spread to widen towards 37bps in early November. We feel that SGD rates are too high relative to USD rates. Some of this has been playing out with this spread narrowing to 28bps. There has been a divergence with 2Y SORA below the peak seen in early November while 2Y SOFR has shifted to new highs.

    We think the current fair value spread should be closer to the 10-20bps range. Note that this spread is not constant and shifts depending on stress factors and points in the economic cycle. If perceived tighter SGD liquidity persists, there would be a floor on how tight this spread can go. A drop towards zero in the near term does not look likely. However, if we broaden out the horizon to four or more quarters, we think that the beta of SGD rates to USD rates would be less than one. This should be more apparent when the Fed starts to hike rates and the Monetary Authority of Singapore (MAS) take a more hawkish stance (another round of tightening is plausible in 2022).


    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]

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