SGS bonds rallied on soft growth and fading inflation

Longer-dated SGS yields fell by up to 50bps.

Domestic inflation is expected to continue its decline amid the cooling in domestic asset prices and the plunge in crude oil prices.

According to a report by OCBC Treasury Research, headline CPI dipped into negative territory at -0.3% in Nov for the first time since Dec 2009, while core inflation also eased to 1.5% (low since Jan 2013).

This benign inflationary environment has also aided the rally in the SGS bond market. In fact, the rally in SGS yields outperformed that of the US Treasury bond market over the past month, with the longer-dated SGS yields falling by up to 50bps versus 38bps for its US counterparts.

Nevertheless, the 10-year UST yield is now trading some 5-10bps below that of the 10-year SGS bond, which was last and briefly seen in Dec 2008 during the Global Financial Crisis.

OCBC adds that this anomaly may normalize ahead of the 30-year SGS re-opening that is due in Feb. Before then, there is a $3bn re-opening of the 2-year SGS bond for auction on 28 Jan.