MAS mopping up excess liquidity amid decline in interest rates
Singapore
THE plunge in short-term local interest rates has prompted the regulator to mop up excess liquidity by increasing the size of its bill auctions.
The weekly Monetary Authority of Singapore (MAS) bill auction sizes have responded to ample liquidity conditions domestically, with one-month bills starting the year at S$1.4 billion and increasing to S$1.6 billion on Jan 30, noted Heng Koon How, United Overseas Bank's head of markets strategy.
Similarly, three-month bills have gone up from S$5.1 billion at the beginning of the year to S$5.8 billion on Jan 30; six-month bills rose from S$2.6 billion to S$3.2 billion on Jan 25, he said.
MAS bills are among instruments used by the central bank to manage liquidity in the banking system.
Mr Heng said: "Correspondingly, using the three-month Sibor as an example, the rate of decline in yield has slowed over the past week."
The three-month SOR (swap offer rate) and Sibor (Singapore interbank offered rate) have given up the gains of the past few months, pressured by the weakened US dollar, though they have steadied since Monday.
The latest three-month SOR and three-month Sibor, at 0.937 per cent and 1.126 per cent, are back to October and November levels. SOR is a benchmark for commercial loans, while Sibor is used to price home loans.
The rapid fall in interest rates, due to the unexpected decline in the US dollar, have caught traders offguard, and some are warning that the one-way bets could lead to a snapback.
"The recent pace of decline of the US dollar was unexpected, reflected by the breadth of analysts' forecast revisions," said Mr Heng.
Analysts are revising their projections for US dollar/Sing dollar. Maybank Singapore now expects the Sing dollar to strengthen towards 1.25 and slightly below by end of the year. On Tuesday, it was quoted at 1.31; 12 months ago, it stood at 1.43.
"The consensus opinion on the US dollar remains negative. If risk asset volatility remains low, we could continue to see SOR rates struggling to move higher. However, as SOR is tied to the US interest rate trajectory, we continue to anticipate a gradual increase in SOR this year," said Mr Heng.
The US Federal Reserve is expected to hike interest rates three to four times this year.
DBS Bank rate strategist Eugene Leow said the bank was increasingly wary of a snap higher in Sing dollar interest rates.
"Bets on US dollar weakness (and Sing dollar strength) have become one-sided and we think that complacency is starting to seep in."
The US dollar weakness is way overdone, he added, and pointed to the overly wide spread of 83 basis points between the US and SOR rates. The widening spread is due to the SOR's continued fall while the US rate has been rising. The six-month average spread has been about 46 basis points, he said.
