Prepared by Treasury Research & Strategy SGS REVIEW & STRATEGY January 2015 Your monthly guide on trend and outlook for Singapore government securities Fundamental Highlights Global growth forecast downgrades have begun in Jan. The World Bank has pared 2015 growth from 3.4% to 3%, highlighting significant and downside risks to the global recovery, especially arising from financial volatility spike, intensifying geopolitical tensions and prolonged stagnation in Europe or Japan. The IMF followed suit by paring 0.3% points to 3.5% in 2015 and 3.7% in 2016, with IMF MD Lagarde reiterating that lower oil prices and US growth are not a cure for deep-seated weaknesses elsewhere. The US remains the sole bright spot, but was not sufficient to offset the less sanguine outlook for the Eurozone, Japan, China, Russia, EM and commodity exporters. Heightened anticipation of an ECB bond purchase program had recently helped to drive global government bond yields lower. Note short-dated government bonds yields have turned negative for Japan and many European countries. SNB also unexpectedly lifted its franc cap to the Euro, prompting upheaval in the currency markets. BOC also unexpectedly cut rates by 25bps to 0.75%, citing the oil shock. Given that macro-economic uncertainties and central bank policy divergences are likely to persist in 2015, expect market volatility to remain elevated, with the flattening bias in bond yield curves also intact. The US Treasury bonds rallied in anticipation of ECB’s QE program S’pore’s SGS bond market also saw a nice rally SGS Review and Outlook SGS bonds rallied on soft growth and fading inflation. The 2015 growth outlook for the Singapore economy has not deviated too significantly from the 2.8% pace chalked up last year. Our forecast is for GDP growth of 2-3%, accompanied by benign inflation of 1% (headline) and 2.1% (core). With the FY15 Budget due on 23 Feb, there is some speculation that the productivity targets (currently 2-3% pa) may be tweaked or extended, and businesses have called for restraint on any further tightening on the foreign manpower front, especially for foreign worker levy and/or quotas. Further down the road, market speculation is revolving around the possible unwinding of some temporary property measures, and even elections (only due by Jan 2017). Domestic inflation continued to subside with the cooling in domestic asset prices and the plunge in crude oil prices. Headline CPI dipped into negative territory at -0.3% in Nov for the first time since Dec 2009, while core inflation also eased to 1.5% (low since Jan 2013). This benign inflationary environment has also aided the rally in the SGS bond market. In fact, the rally in SGS yields outperformed that of the US Treasury bond market over the past month, with the longer-dated SGS yields falling by up to 50bps versus 38bps for its US counterparts. Nevertheless, the 10-year UST yield is now trading some 5-10bps below that of the 10-year SGS bond, which was last and briefly seen in Dec 2008 during the Global Financial Crisis. This anomaly may normalize ahead of the 30-year SGS re-opening that is due in Feb. Before then, there is a $3bn re-opening of the 2-year SGS bond for auction on 28 Jan. OCBC Bank For research enquiries, please email [email protected] Group Treasury Treasury Research & Strategy Selena Ling (65) 6530 4887 Fixed Income Sales Lee Siu Gim (65) 6349 1810 SGS Trading Pan Tan (65) (65) 6530 4723 Prepared by Treasury Research & Strategy January 2015 SGS REVIEW & STRATEGY Your monthly guide on trend and outlook for Singapore government securities Indicative SGS prices as at 22 Jan 2015 Issue Maturity Coupon Bid Price Ask Price N509100N N708100S Oct-14 01-Jul-15 1.38% 2.875% 100.27 101.00 100.31 101.04 Bid Yield 0.30% (%) Ask Yield 0.14% (%) 0.59 0.50 N511100W 01-Apr-16 1.125% 100.61 100.65 0.61 0.57 NY01100F 01-Sep-16 3.750% 104.98 105.08 0.63 0.57 N710100Z 01-Apr-17 2.375% 103.65 103.75 0.69 0.65 N513100T 01-Apr-18 0.500% 98.80 98.90 0.88 0.85 NY03100A 01-Sep-18 4.000% 110.36 110.46 1.06 1.04 NX09100W 01-Jun-19 2.500% 105.30 105.40 1.25 1.22 N514100H 01-Oct-19 1.625% 101.18 101.38 1.36 1.32 NY05100N 01-Sep-20 3.250% 109.06 109.26 1.56 1.52 NX11100X 01-Jun-21 2.250% 103.35 103.55 1.69 1.66 NY07100X 01-Sep-22 3.125% 109.40 109.60 1.80 1.77 NX13100H 01-Jul-23 2.750% 106.70 106.90 1.89 1.86 NY09100H 01-Sep-24 3.000% 109.50 109.70 1.91 1.89 NZ07100S 01-Mar-27 3.500% 114.25 114.55 2.16 2.13 NY14100E 01-Jul-29 2.875% 107.25 107.55 2.28 2.26 NZ10100F 01-Sep-30 2.875% 107.30 107.70 2.31 2.29 NZ13100V 01-Sep-33 3.375% 115.00 115.40 2.37 2.35 Co.Reg.no.:193200032W Page 2 of 2 This publication is solely for information purposes only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our prior written consent. 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