MAS mopping up excess liquidity as Singapore interest rates fall

THE plunge in short-term local interest rates has prompted the regulator to mop up excess liquidity by increasing the size of the bill auctions.

The weekly Monetary Authority of Singapore 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 $1.6 billion on Jan 30, 2018, noted Heng Koon How, United Overseas Bank head of markets strategy.

Similarly, three-month bills have increased from $5.1 billion at the beginning of the year to $5.8 billion on Jan 30, while six-month bills rose from $2.6 billion to $3.2 billion on Jan 25, he said.

"Correspondingly, using the three-month Sibor as an example, the rate of decline in yield has slowed over the past week," said Mr Heng.

The 3-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 steadied since Monday.

The latest 3-month SOR and 3-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 which was due to the unexpected decline in the USD have caught traders offguard, and some are warning that the one-way bets could led to a snapback.

"The recent pace of decline of the US dollar (USD) was unexpected, reflected by the breadth of analysts' forecast revisions," said Mr Heng.

Analysts are revising their projections for USD/SGD. Maybank Singapore now expects the SGD to strengthen towards 1.25 and slightly below by end of the year. The SGD on Tuesday was quoted at 1.31. Twelve months ago it stood at 1.43.

"The consensus opinion on the USD 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 rates 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 3-4 times this year.

We are increasingly wary of a snap higher in SGD interest rates, said Eugene Leow, DBS Bank rates strategist.

"Bets on USD weakness (and SGD strength) have become one-sided and we think that complacency is starting to seep in," said Mr Leow.

The USD weakness is way overdone, said Mr Leow who also 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 months average spread has been about 46 basis points, he said.