Short-term SGD rates and liquidity signals; Floor for INR rates
Short-term SGD interest rates are sending conflicting signals on SGD liquidity. The Sora and MAS bills are showing that liquidity is flush. Comparatively, the Sor (an fx-implied) rate and Sibor are somewhat elevated. We think that the Sora and bills are more representative of system liquidity. Current conditions are conducive for inflows. The signing of the China-US phase 1 trade deal and an improvement in global electronics manufacturing have encouraged risk taking. With the SGD NEER estimated to be closer to the top of the band and the USDSGD pushing below 1.35, it makes more sense that liquidity is becoming more flush. The Lunar New Year has probably skewed liquidity slightly tighter. However, we would expect this seasonal effect to fade over the coming two weeks. Further out, we think that that a looser fiscal stance and continued Net Investment Returns Contribution (NIRC) suggest that SGD liquidity will improve. We expect Sibor, Sor and USDSGD forward points will head modestly lower.
India rates: Four factors mark a near-term floor for yields
In a data-light week, market operations will dictate yield movements. 10Y INR bond yield (generic) held above 6.6% on Monday, steady from last week and off December lows seen in wake of the first buy-sell open market operation (OMO).
Four factors are likely to mark a near-term floor for yields. After a hiatus, the RBI announced the 4th tranche of the special buy-sell OMOs worth INR100bn on Jan 23. Papers due in 2021 will be sold in exchange for bonds maturing in 2024 and 2029; reinforcing the intention to soften yields across the belly-to-long end of the curve. But the impact on rates was offset by yesterday’s bond switch (converted INR130bn bonds converted to longer-tenor papers).
Secondly, markets await clarity on the Budget, which has kept the term premia (10Y yield minus repo rate) elevated at >140bps. Slew of press reports provide mixed signals - a section expects last minute support from interim dividends from the central bank (likely to be discussed at the RBI Board meeting) and dividends from public sector companies (after monetising assets), which could minimize the extent of fiscal slippage (Business Standard). Another report cited sources that off-budget spending and other deferred liabilities might be brought on to the books to provide transparency, resulting in a sizeable slippage (Economic Times). Our pre-Budget views can be found here (PDF, HTML). We suspect that yields are unlikely to correct sharply even if fiscal targets are adhered to, as concerns will arise on the underlying revenue and growth assumptions.
Thirdly, since the central bank pulled the brakes on the easing cycle, 2Y yields have bounced off lows, just as high inflation marks a floor for the long end. Inflation is likely to stay above target at least 2H-3Q20 before base effects soften the headline print. Finally, oil prices remain the wildcard as prices bounce off lows, with an eye of macroeconomic implications. In all, the recent 2Y10Y flattening bias in the yield curve is likely to hold, with limited downside for the long-end of the curve.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein 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. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422