Wednesday, July 27, 2016

First 20y SGS New Issuance Since 2013 to be Well-Received

26 July 2016

Rates & FX Auction Preview

First 20y SGS New Issuance Since 2013 to be Well-Received

Auction Details

Announcement Date          : 20 July 2016
ISIN / Issue Code : SG31A9000002 / NZ16100X
Maturity                                  : 01 August 2036
Tenor                                     : 20y
Coupon                                 : To be determined at auction
Size                                        : SGD1.5bn (MAS taking SGD200m)
Closing Date                        : 27 July 2016
Settlement / Issue Date      : 01 August 2016
Indicative Range  : 2.25-2.30%

Brief Commentary
¨      The Singapore government will issue SGS 08/36 which will replace SGS 3.375 09/33 as the new 20y SGS benchmark with the auction featuring the first 20y new issuance since 2013. The auction will be held just ahead of the release of July FOMC statement, where the improving sentiment and increasingly hawkish inclination post Brexit shock (probability of FFR in 2016: 47.7% vs 9.2 seen at the end of June) could result in modestly higher cutoff yields as a result, amid higher UST yields and softer SGD. Furthermore, with directional yield movements remaining sensitive to relative performance of SGD vs USD, the incrementally dovish global central banks (i.e. ECB, BoE, BoJ, and RBA) is likely to continue fueling the broad USD recovery, thereby exerting upward pressure on the USDSGD pair and SGS yields. 
¨      Following the 20y new issuance, the modified duration for SGS ALL would climb higher to 6.98 years (+0.12 year) skewed towards the longer dated maturity bucket (>10y), but likely to be mitigated in the following months with the 2y and 5y papers issued in September and October. As the 20y SGS is the final long dated paper for the calendar year, we expect the new issuance to be well-received, with coupon for the paper likely to print at 2.25% while cutoff yields to print between 2.25-2.30%. Similar to previous auctions, we expect domestic real money players to anchor the auction, underscored by index matching and reinvestment needs (redemption in September: SGD7.7bn; former 15y paper). With the new 20y benchmark only likely to offer c.10bps (top of the indicative range) despite a duration extension of more than 2 years, we recommend for real money accounts to adopt a neutral weight on SGS 08/36, given little upside in switching into incoming 20y benchmark after accounting for transaction costs. Looking further, the revisions to the risk based capital framework could favour the insurers’ demand for longer dated SGS spurred by duration extension in search for higher yields amid easing capital regulation restrictions.
¨      As global central banks continue to pursue dovish monetary policies, fuelling the pool of negative yielding bonds, we continue to expect flushed liquidity within the Asian bond markets to persist as investors search for higher yields beyond their shores. On top of higher ratings, we see relative attractiveness in long dated SGS against its AxJ peers, in particular the KTBs which spot a flattish curve and higher volatility on the KRW. Compared to similar rated peers, we see better value in the ACGBs, where a similar maturity offers c.20bps of pick up above the top of our indicative range alongside higher carry and better capital preservation against a backdrop of RBA’s accommodative inclination over the medium term.
¨      Although MAS continued to downplay further easing expectations, SGS continues to trade at a discount of c.10-25bps to USTs of a similar maturity as investors continue to position for further MAS easing in the form of recentering the SGD NEER lower during its MPS meeting in October. We reiterate our neutral stance on SGS over the medium term, which contrasts with our mild overweight view on USTs, as Brexit uncertainty could remain a significant risk for the global economy, exerting pressuring on the export dependent nation and spurring a vertical shift in SGS curve following further MAS easing; opine for 30bps to remain appropriate for SGS-UST spreads up to the 10y tenor.

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