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Singapore's MAS easing among threats to best bonds outside Japan
[SINGAPORE] The biggest bond traders in Singapore say a rally that's challenging Japan in the race to be the world's best-performing debt market is about to end.
A vanishing yield premium versus Treasuries, the outlook for the Federal Reserve to increase US interest rates and the prospect of further monetary loosening at home all point to higher Singapore yields.
Contrary to what happens in bigger economies, easing by the Monetary Authority of Singapore can be seen as bad for bonds because it uses the currency as its main policy tool, and a weaker local dollar can diminish the appeal of the nation's assets.
Singapore's debt has returned 5.18 per cent over six months, second only to Japan's 5.21 per cent among developed-nation bond markets, based on Bloomberg indexes.
The benchmark 10-year yield fell to a 14-month low of 1.84 per cent this week, reducing the premium over similar-maturity Treasuries to two basis points, from 74 as recently as September.
"The question is how long will this last," said Saktiandi Supaat, the head of foreign-exchange research at Malayan Banking Bhd, one of the 13 primary dealers in the city.
"My view is it's going to be one or two months."
The yield will climb to 2.42 per cent by June 30 and to 2.55 per cent by year-end, based on a Bloomberg survey of eight analysts, with the most recent forecasts given the heaviest weightings.
DBS Group Holdings Ltd, Deutsche Bank AG, and Standard Chartered Plc, which are also primary dealers, were among the respondents. All the banks surveyed see yields rising.
The local currency will weaken 5.5 per cent by the year-end to S$1.43 versus the greenback, according to a separate survey of 30 forecasters. It was at S$1.3509 at 12:22 pm in Singapore on Friday.
Singapore's bond rally started in January and extended into March as a rout in stocks and oil prices abated, leading investors to seek higher yields outside the biggest debt markets.
A 5 per cent rally in the Singapore dollar this year against its US counterpart supercharged those returns for overseas investors.
Local bonds got a boost as investors scaled back expectations for the Federal Reserve to raise interest rates, though the trend has run its course, said Ng Kheng Siang, Asia- Pacific head of fixed income in Singapore at State Street Global Advisors, which oversees US$2.24 trillion.
"The bonds have rallied a long way," Mr Ng said. "There would be stronger resistance for yields to decline significantly with reduced Fed rate hike already priced in."
Futures contracts indicate a 54 per cent probability that the Fed will raise rates by December even after investors scaled back forecasts for the extent of the increases.
The slowest economic growth in six years and an inflation rate of minus 0.8 per cent suggest there's room for the central bank to ease policy after doing so twice in 2015.
Singapore home prices dropped for a tenth quarter, posting the longest losing streak in almost two decades, the Urban Redevelopment Authority reported Friday.
The government has made it tougher to get a mortgage and raised taxes on home purchases to bring property prices down following a surge in local housing costs.
The MAS usually reviews policy in April and October. It hasn't announced the date of the next meeting.
The central bank said in October it would "slightly" reduce the pace of the local dollar's "modest and gradual appreciation" versus currencies of its trading partners.
The stance remains appropriate and unchanged, it said Feb 24.
The odds of a central bank shift as soon as this month receded after the government in March announced a budget aimed at boosting growth, according to five economists surveyed by Bloomberg.
DBS, Singapore's biggest lender, Malayan Banking and Barclays Plc say easing in April is still possible.
"The outperformance in Singapore bonds won't be sustainable," said Rohit Arora, an interest-rate strategist at Barclays, also a primary dealer.
The central bank may relax the current policy of seeking a stronger currency, and the move "would put upward pressure on rates," he said.