7y Off-Benchmark SGS Expected to be Well-Received

25 April 2016

Rates & FX Auction Preview

7y Off-Benchmark SGS Expected to be Well-Received

Highlights

Auction Details

Announcement Date          : 20 April 2016

ISIN / Issue Code : SG3260987684 / NX13100H

Maturity                                  : 01 July 2023

Tenor                                     : 7y (off-benchmark)

Coupon                                 : 2.75%

Size                                        : SGD1.3bn (MAS taking SGD200m)

Closing Date                        : 27 April 2016

Settlement / Issue Date      : 03 May 2016

Indicative Range  : 1.92% - 1.97%

Current Bid/Ask                    : 1.984% / 1.955%

Brief Commentary

The Singapore government will reopen the SGS 2.75 07/23 paper. We expect the SGD1.3bn auction to be well-received, anchored by domestic real money players despite being a non-benchmark bond. Yields on the 7y paper are expected to print between 1.92% and 1.97%, with upward pressure on yields likely to be limited by expectations for Fed’s dovish inclination in the FOMC meeting in the week ahead; the paper was last re-opened a year ago at 2.19%.

The 7y off-benchmark bond issuance would bring the total outstanding issuance for the bond to SGD6.6bn, with the paper unlikely to be reopened as a 7y in the year ahead, until closer to maturity. We continue to see relative value in the 2021-2023 maturities vs the estimated curve, recommending for investors to participate aggressively in the upcoming auction; although the 7y paper has the highest modified duration within the 2021-2023 maturity group at 6.49 years, it remains firmly below the UOBSGS duration of 6.98 years post issuance. Additionally, we see a strong likelihood for the healthy demand seen in the 2y SGS auction in March (cutoff yield: 0.96%; BTC: 2.25x) to spillover to the 7y paper given strong refinancing needs from April 2016 redemptions (SGD7.3bn). We also assess the discount on the off-benchmark 7y SGS vs the 7y UST to be adequate given recent spread widening to 30bps (+10bps m-o-m) post MAS MPS, on top of a c.15bps post swap pickup, underscoring the allure of the off-benchmark paper. 

Lastly, gross SGS issuance is likely to remain within our initial expectation of SGD18.5-19.5bn (+16.6% y-o-y), excluding bills and mini auctions, with net supply edging lower towards its 10y average range of SGD3.5-4.5bn (-43.7% y-o-y), allaying concerns of weaker demand amid depreciation pressures on USDSGD as MAS continue to explore its option to ease the SGD NEER. We reiterate our neutral stance on SGS over the medium term, as we remain cautious of the possibility of a vertical shift in the SGS curve should further deterioration in the global growth outlook persist, keeping MAS gearing towards further easing in its upcoming October meeting (i.e. re-centering of midpoint).