Hey everybody, here’s my monthly post on the SSB closing and the forecast for next month. I’m trying to streamline my posts to make them more condensed and info-packed in a regular structure, so it’s both easier for readers to quickly digest the article and for me to pump them out on a regular basis.
I have made a similar posts in previous months, and I think I will stick with this format.
First up is update of the subscription of the previous issue. As previously mentioned, the SSB will probably have $300 million available to be issued every month of 2016. While it is a HUGE drop from the $1,200 million that they were offering in 2015, the SSB take up rate has been… pathetic, so it makes sense to cut down on the total offer to boost up the fill rate. It looks a look less sad now.
For the March 2016 SSB, a just as pathetic take up rate of just over $25 million was done. That’s almost 8% of the issue. Demand for SSBs look low to actually even decreasing in the future. By just looking at the absolute amount, you can see that demand is falling.
This month, as expected, the yield curve was manipulated by moving the 1 year rate down to match the 2 year rate. Of course, having a yield curve inversion is a no-no. This move is similar to what happened for the Dec 2015 issue last year, but of a much smaller magnitude. The 5 year rate strangely showed a higher than normal deviation from its predicted value.
Moving onto the next SSB, we use the same old-fashioned method of looking up the data from MAS and constructing the table below. As a refresher, the current month’s rates are used as a proxy for the issue in 2 months time (For example: Mar 2016 rates are used for the May 2016 issue). Also, if you are in the first 3/4 of the current month, you application this month is for the bond that is too be issued on the 1st of next month (For example: Mar 2016 applicants will receive the May 2016 issue). I hope this clears up some of the confusion people have regarding the names of the issues.
With 18 out of 22 data points available for this estimate, I think that this estimate would be rather accurate as compared to the previous months. I would hazard a guess of 0.99 / 0.99 / 1.76 / 2.12 as the final yields.
One thing that you might notice is that we have the average rate of the 1 year being higher than the 2 year AGAIN. At Central Banking 101 classes, they will tell you that this should NEVER happen (since yield inversion signals a broken / breaking credit market). So, just like how we saw the Dec issue be manually adjusted to limit the 1 year yield against the 2 year yield, I am expecting the exact same kind of market manipulation for the May 2016 issue yields.
This upcoming issue looks set to be the weakest SSB issue since it has started. All time lows in the 2, 5 and 10 year returns should be posted in the next issue. The current month’s issue is definitely better than next month’s issue, if your decision were really that simple and binary.
I would not be applying for this month’s issue, and I’m 99% I will not be applying for next month’s one as well.