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ANZ’s Irene Cheung is of the view that larger supply of government bonds/securities is the key reason behind the negative swap spread (interest rate swap less government bond yield) at Singapore.

Key Notes:

  • In our view, the key reason behind the negative swap spread is a larger supply of government bonds, Singapore Government Securities (SGS), and more importantly, Singapore Savings bonds (SSB). An elevated loan-deposit ratio does not help.
  • A continued rolling of long USD/SGD forward positions, likely to sterilise FX intervention, also suggests no injection of SGD liquidity.
  • The increased bond supply (especially for SSBs) will likely continue. Also, the replacement of 24-week MAS bills by 6M Treasury bills from July will widen the investor base and could lead to increased supply of T-bills over time.
  • We think swap spreads could stay negative. Buy-to-hold investors who have access to FX swaps in size could consider funding short-dated bills (earning 1.90-1.95%) by 1M swap (around 1.70-1.75%).