A Tribute to the Traders of the Singapore Bond Market
Who would have thought that chopping onions would be the perfect catalyst for the inspiration to write a post to applaud the Singapore bond market traders?
Yes, as the tears streamed down, the thoughts abruptly pivot towards our friends in the Singapore bond market whom we had caught up with in the past fortnight. Our friends who are still battling on, years after many of their peers have thrown in the towel on the bond market which has been increasingly described as a “waste of time” which goes to say so much for our effort to write about it.
We have overheard, on more than a few occasions, as we eavesdropped on traders’ conversations that Singapore bonds are a waste of time and thus we feel some recognition must go out to the people we know who are staunchly making an effort to remain in one of the hardest markets to trade in the developed world—the Singapore bond market, that we would like to dedicate this short post to their struggles in tribute to their bravery in trading a market that has no monetary policy and 2 benchmark interest rates that the central bank offers no guidance on—SIBOR and SOR, which leaves them pretty much to their own devices for survival tactics.
The Struggles of the Repo Man
Thanks to the tears from the onions, we recall our meeting with a young repo trader who was tearing his hair out because he cannot figure out how repo rates worked in Singapore.
One day it would be close to 2% and then utterly collapse the following day to 1% and he cannot make any sense of it because SIBOR has not changed in the meantime and he did not know whether to rely on SIBOR or the SOR or the short term t-bill rates to make a price.
He fumed that he could not quote a sensible rate because clients with access to US dollars would expect the repo rate to be closer to the SOR, for they can easily swap the USD into SGD to get that. Yet he is unable to offer that lower rate to clients because his funding rate is at SIBOR and, as such, he is unable to get any business done.
Checking on the graph below, we can see that he is right. The LIBOR implied 1 month SGD SOR rate is 0.89323% which is way lower than the 1 month SGD SIBOR at 1.37172% and we can see why he is in despair. Throwing in the 1 month government t-bill rate, we, too, wonder what is going on?
With the rest of the LIBOR world will be moving to the SOFR (Secured Overnight Funding Rate) i.e. repo rate, in the near future, we wish our repo friend all the best in his endeavours for Singapore repos.
The Struggles of the Bond Trader
Thanks to the tears from the onions, we are reminded of our lunch with some old friends who were discussing about the Jun 2021 government bond swap spread, and their inability to comprehend why folks would want to sell the spread at 3.5 bp, unloading the precious government paper at 1.97% (as an illustration) and selling the interest rate swap at 2.005%?
The US swap spreads are on a widening trend with the 2Y UST swap spread at 31 bp which makes the SGS swap spread look sickly in comparison, even when currency swapped into USD, so much for Singapore’s AAA status.
Our outsider point of view turned out to be an invaluable revelation when we suggested that it was the funding problem. For you see, buying the SGS swap spread does not hedge you for the cost of funding because paying the swap at 2.005%, will only hedge you for the SOR (which you will receive in return for paying the swap), which is below the SIBOR and that would diminish the returns.
In comparison, the UST swap spread nets you LIBOR which is the funding rate which is the end of the matter.
When an investor cannot fund his position at a meaningful rate and the repo market for SGS is still quite dysfunctional, who would want to take on that risk, especially when the MAS decided last Friday during their semi-annual MPS to allow the SGD to appreciate just a little, which means the days of currency speculation and play are over?
While we concluded that the reason for the 3.5 bp swap spread in the Jun 2021 bond has probably less to do with the SIBOR vs SOR differential, than heaps of more credible reasons, we agreed that the funding rate will continue to play a bigger part of the picture in the days ahead as the central banks turn off the liquidity spigot.
The Struggles of the Credit Trader
Thanks to the tears from the onions, we remember a credit trader friend choking back her laughter a few weeks ago.
Yes, she prices her credits on the SOR curve but she funds in SIBOR and there are some lucky bastards out there who get to choose, and have the flexibility of funding in LIBOR which has netted them cheap SGD dollars at SOR rates this year as a relative advantage over the poor SIBOR funded folks.
The recent months have been a struggle for the SGD credit markets because of the SIBOR problem which has caused HDB and stat board spreads to blow out in the short end (<2 years) while the long end worsened less, creating an inverted credit curve for HDB. The contagion has finally spread to the rest of the credit market and we have the likes of SIA and Capitaland widening in line.
How do you price bonds with 2 interest rates to consider? She finds it hard to explain to the proper credit traders (non SGD dollar) that she meets and considers it an affront when some suggest that Singapore is a 3rd world cash price bond market.
Well, we know she knows that too, making her money buying at high prices and selling at low prices with the right amount of hedging and that makes her job double hard, to call those hedges right.
And The Award Goes To…
Traders have come and gone but it was and remains the short straw to land the SGD trading portfolio and over the years, the joke is that SGD trader is invariably the last on the desk to afford a Porsche despite the irony that it is the toughest product to trade.
For the common knowledge that it is a “waste of time”, we have to applaud those traders out there trying to make sense of the market and working hard to make it work (while trying hard to get a transfer or another job) even though the casual observer and investor may take their efforts for granted.
We have read a lot about LIBOR and OIS but people do not talk about their struggles with SIBOR or SOR because it is just the way it has been which is perhaps forward-looking of DBS and gang to decide to use their deposit rate to peg mortgages too. Perhaps consider extending that as an option to PB loans as well, for the sake of the local bond market?
The smart PB clients would ask for LIBOR loans and then have them swapped to cheap SGD funding in SOR for the time being until the trend turns as we worry for our brave friends trading such markets, applaud them, admit we are losers because we do not understand any of it and pat ourselves on the back because we rather look at other stuff.