10y SGS New Benchmark Issuance Expected to be Well Received

26 May 2016

Rates & FX Auction Preview

10y SGS New Benchmark Issuance Expected to be Well Received

Highlights

Auction Details

Announcement Date          : 20 May 2016

ISIN / Issue Code : SG31A8000003 / NX16100F

Maturity                                  : 01 June 2026

Tenor                                     : 10y

Coupon                                 : To be determined at auction

Size                                        : SGD2.5bn (MAS taking SGD200m)

Closing Date                        : 27 May 2016

Settlement / Issue Date      : 01 June 2016

Indicative Range  : 2.20-2.25%

Brief Commentary

The Singapore government will issue the SGS 06/26 paper which will replace SGS 2.375 06/25 as the new 10y benchmark. The new 10y benchmark will be issued after a week of heavy data releases in Singapore and US, where the persistently tepid economic data out of Singapore continued to weigh on SGD and in turn SGS. Major catalysts for SGS over the next 6-12 months remain fixated on directional movements on USTs alongside relative strength on SGD against USD, with a relatively low likelihood for FOMC to raise rates in June (ahead of Brexit referendum) likely to limit upward momentum on SGS yields over the near term.

Being a key benchmark issuance, we expect the auction to be well received, with expectations for coupon on the new issue to print at 2.25% while cutoff yields to print between 2.20-2.25%. We opine for domestic real money players to anchor the auction given both index matching and reinvestment needs (redemption in September: SGD7.7bn), where we hold a neutral to mild overweight stance on the paper, particularly if yields cutoff near the upper bound of our indicative range. This is in view of the attractive spread against UST of a similar duration (i.e. 10y) at c.35bps which would provide a reasonable cushion amid the weak SGD outlook over the next 6 months.

Additionally, we would recommend for investors to be relatively aggressive in switching out from the old benchmark (SIGB 2.375 06/25) into the new 10y benchmark (SIGB 06/26) despite only acquiring c.10bps while extending modified duration by almost 1 year. This is because, on top of better liquidity associated with a benchmark bond, the old benchmark may continue to cheapen as it trades alongside the belly bonds (i.e. 2021-2024), suggesting better value in holding the new benchmark.

Following the 10y auction, modified duration for SGS will increase by 0.04 years to 6.95 years, with the duration bucket skewed towards the long dated maturity bonds (>10y) (Pre 10y: 28.0%; Post 10y: 30.0%). However, with only 1 more long dated paper to be issued in August (20y), the duration skew is likely to be mitigated by the 3 short to mid dated bond issuances for the rest of the year, which is likely to be well received by both offshore and domestic investors amid the uncertain global backgrop this year.

Lastly, gross SGS issuance remains on track with our initial expectations of SGD18.5-19.5bn for the year, excluding bills and mini auctions, allaying concerns of weaker demand for SGS amid depreciation pressures on USDSGD as MAS continue to explore its option to ease the SGD NEER to cushion the Singapore economy. We reiterate our broad neutral stance on SGS over the medium term, which contrasts with our mild overweight stance on USTS, as we remain cautious of the possibility of a vertical shift in SGS curve should further deterioration in global growth outlook persists, keeping MAS gearing MAS towards further easing in its upcoming meeting in October (i.e. re-centering of midpoint).