SGS: RV vs IRS


SGS are cheap compared to swaps.
Eugene Leow31 May 2018
Photo credit: AFP Photo


Making the most of tight liquidity

Tight liquidity conditions are making SGSs compelling relative to interest rate swaps. Notably, bond-swap spreads have narrowed close to zero across multiple tenors (2Y, 5Y and 10Y). For the 10Y tenor, this development has only occurred twice since 2013. In both instances, the bond-swap spread stayed negative only for a very brief period and widened swiftly in the coming few months. To put things into perspective, the average and median spread since 2013 is at 24bps. From a risk-to-reward perspective, paying SGD swaps and going long the equivalent tenor SGS results in minimal negative carry and significant upside if bond-swap spreads widen to more normal levels (10-20bps).



Signs of tight liquidity is not immediately apparent. Typically, a wide spread between the 3M Sibor and the 3M Libor is a signal that SGD liquidity is flushed. By this measure, there is ample SGD in the system with the spread at 81bps (very large by recent standards). We reiterate that Sibors and SORs may not be reflective of the current tightness in SGD liquidity. One sign that stood out was the climb in yields on 4W bills to 1.61% at the auction on Wednesday. While the yield cutoff for the latest 3M and 6M auctions appear relatively normal, significantly higher rates for the very short tenor suggest that SGD is tight at least for the immediate term.



To read the full report, click here to Download the PDF.


Eugene Leow

Rates Strategist - G3 & Asia
eugeneleow@dbs.com

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only.  It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose.  Opinions and estimates are subject to change without notice.  The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information.  Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities.  Foreign exchange transactions involve risks.  You should note that fluctuations in foreign exchange rates may result in losses.  You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such.  Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof. 

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.  The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.