Short-term SGD rates and liquidity signals; Floor for INR rates

Short-term SGD interest rates are sending conflicting signals on SGD liquidity. In a data-light week, market operations will dictate INR bond yield movements.
Eugene Leow, Radhika Rao21 Jan 2020
    Photo credit: AFP Photo

    Rates: Short-term SGD rates and liquidity signals

    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.

    Eugene Leow

    Rates Strategist - G3 & Asia

    Radhika Rao

    Economist – India, Thailand & Eurozone

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