$1.1bn 20-year SGS bonds to attract insurers if yield exceeds 3.45%

But, the SGS bond is currently yielding only around 3.33 percent.

According to OCBC, the $1.1b re-opening of the 20-year SGS bonds maturing September 2030 will be auctioned on Thursday. The auction may see a bid-cover ratio between the 1.77x (Feb'08 sale of $1.3b) and 2.37x (Feb'09 sale of $0.7b) range, and any yield above 3.45% is likely to attract the insurers, albeit there are concerns about the inflation overshoot.

The 2011 official CPI forecast was upgraded from 2-3% to 3-4%, with 6% possible in Q1. We see fair value yield around 3.45% as well, based on historical bond-swap spreads, and do not expect the tail to exceed the average 9bps seen in the last four 20-year SGS bond auctions from 2007. The next scheduled SGS bond auction is the new 5-year on 1 April.