With US credit downgrade, Singapore's AAA bills offer an opportunity for US carry trade
[TORONTO] Some of the safest assets in Asia offer investors a yield pickup to Treasuries in the wake of the US losing its last AAA credit rating.
Investors looking to rotate out of the US dollar and into Asia can buy securities issued by the Monetary Authority of Singapore (MAS), which is using them to steer the amount of cash in the banking system. Three-month MAS bills offer yield of about 13 basis points over similar-tenor US government debt when currency-hedging costs are taken into account, according to data compiled by Bloomberg.
The financial market turmoil triggered by US President Donald Trump's tariff threats, coupled with Moody's Ratings' decision to cut the US credit ranking last month, is prompting investors to reassess the role of the US dollar in the global economic system. Some are shifting money elsewhere, and Singapore is a popular destination given it's the only sovereign in Asia with a AAA score at S&P Global Ratings.
'Getting the pickup from MAS bills on a swapped basis has always been a popular trade,' said Eugene Leow, a fixed-income strategist at DBS Bank in Singapore. Singapore's government bonds, 'given the AAA rating and prudent government finances, are proving to be very attractive for investors looking to diversify their holdings', he said.
To hedge, a US-based investor can exchange US dollars for the Singapore currency in the spot market while simultaneously selling the latter in the forwards market.
Investors are increasingly looking to shift assets away from the US due to growing doubts about whether Treasuries offer enough compensation after the recent ratings downgrade and concern that Trump's proposed tax and spending bill will worsen America's finances. When Moody's downgraded the US in May, it warned that the country's fiscal deficit, government debt and interest burden would all rise in coming years.
For its part, Singapore has been steadily increasing the size of its debt market. The amount of MAS bills outstanding climbed to S$345.5 billion at the end of May, an all-time high based on data compiled by Bloomberg going back to 2011.
There appears to be plenty of demand for the securities.
'There are still some investors out there who need triple AAA-rated assets,' said Winson Phoon, head of fixed-income research at Maybank Securities. Given the record amount of MAS bills outstanding, it 'looks like the inflows are still coming' into Singapore, he said. BLOOMBERG
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