Foreign fund managers have recently been putting on bond versus swap spread plays in the Singapore dollar-denominated market to take advantage of an expected widening in the spread between the term repo rate and swap spreads. "It's one of the oldest trades in the book," said Bryan Yap, head of interest-rate swaps, Asia, at Deutsche Bank in Singapore, noting that its only recently become feasible in the local market. Interest-rate swappers declined to detail the notional size of typical transactions and Yap could not be reached for comment on this point.
In a typical trade, an investor buys 10-year fixed-rate Singapore government bonds yielding 3.58%, and then raises cash on these bonds via the repo market and pays an annualized funding rate of 2.05%, according to William Oswald, fixed income strategist at Deutsche Bank in Singapore. At the same time the investor enters a 10-year interest-rate swap in which it pays 3.715% fixed and receives the floating swap offer rate, currently 2.31%. While the investor is paying out 13.5 basis points on the difference between the bond yield it receives and the fixed rate it pays in the swap, the position makes 26bps on the spread between the floating rate the investor receives in the swap and the term repo funding rate, he explained. The absolute levels of the repo and swap offer rate may change, but the spread between them is most likely to widen, increasing the profitability of the transaction.
One of the most significant factors that has driven liquidity in the repo is that in the last few months the Monetary Authority of Singapore has started using the repo market for monetary authority intervention, rather than the foreign exchange market which it had traditionally used, Oswald explained. The MAS recognizes the importance of a deep and liquid repo market for the growth of the secondary bond market, he continued. Officials at the MAS could not be reached by press time.
