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.



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Eugene Leow

Rates Strategist - G3 & Asia
eugeneleow@dbs.com

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