MAS slope reduction to push short end rates higher

At the October monetary policy meeting, the MAS lowered the SGDNEER slope, likely by 0.5%. This slope reduction, ceteris paribus, erodes the embedded FX carry in the SGD rates and should result in a 50bp upward re-pricing of short-end SGD rates versus the basket yield, says Barclays. The knee-jerk reaction in rates market was muted. 

The MAS's monetary policy hinges on exchange rate management, and the rates markets are affected through the "expectations" channel. During periods of slowing growth, the MAS is biased toward easing monetary policy, which pushes forward rates higher as a result. Therefore, counter-intuitively, easing policy in Singapore results in higher rates - as has been observed in the past nine months.

"At the October MPC, the MAS lowered the SGDNEER slope. The MAS does not reveal the level of the slope, it has been lowered by 0.5% from today. Current valuations do not reflect a slope reduction, positioning skewed towards receivers. As such today's slope reduction, ceteris paribus, further erodes the embedded FX carry in the SGD rates, and should result in a 50bp upward re-pricing of short-end SGD rates versus the basket yield", says Barclays.