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SGD rates have outperformed USD rates over the past few months but we think that this phenomenon looks overdone. Since end-September, 5Y SORA has risen by just 10bps compared to 55bps for the 5Y SOFR. Note that this period takes into account Fed easing as well as the re-pricing across USD rates due to Trump’s victory in November. As such, the 5Y SORA-SOFR spread has since compressed to a cycle low of -135bps. We are not convinced that that the spread can continue to tear. To be sure, the passthrough from lower USD rates unto SGD rates have been fairly sizable thus far (the Fed has cut by 75bps while the SORA has fallen by approximately 60bps). Part of this can probably be attributed with the MAS keeping to the same pace of SGD NEER appreciation despite Fed cuts. This divergence in policy and improved liquidity conditions helped to keep SORA-SOFR spreads tight.
That said, there is a limit to how much the spread should tighten. Intuitively, given the lower absolute figure, SGD rates should not fall as much as USD rates during a Fed cut cycle. Moreover, it might not make sense for the spread to be wider now (compared to a few more ago) given that the bias for the Fed and the MAS is still towards easing. Twin easing by the two central banks should trigger wider SORA-SOFR spreads. At current levels, we think 5Y SORA looks too low on a relative (to 5Y SOFR) basis.
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