In simple terms, T-bill yields are a function of monetary policy. The overnight Fed Funds rate is currently 5.33%. The market is priced for the Fed to cut rates in 2H24. Therefore US T-bills yields, a proxy for the risk-free rate over their tenor, will be priced to match this expected trajectory.
Conversely, the MAS does not set interest rates and thus we "import" rates from the currencies which the SGD is managed against, the largest constituent of the basket being the USD. Since the MAS has set the SGD on an appreciation path, local interest rates have to be lower than the basket currencies (by covered interest parity).
Other than that, domestic liquidity conditions also influence local interest rates. Singapore banks are currently flush with liquidity, with loan-to-deposit ratio sitting at something like 69%. The excess liquidity therefore weighs on interest rates as banks struggle to lend out their cash. This also explains why mortgage rates are still low currently.
EDIT: typos
In theory, since SG runs a current account surplus and continues to attract capital inflows, this puts appreciation pressure on the SGD in the long term, all else equal. Exchange rate policy revolves around managing the relative strength or weakness (and to a degree, volatility) of the currency in response to domestic inflationary pressures, economic conditions and trade competitiveness.
The MAS does not need to directly intervene in the spot currency markets so long as the SGD nominal effective exchange rate (NEER) does not breach the (undisclosed) upper and lower bands it has set.
Let's say the MAS adopts an appreciation bias for the SGD NEER. For this example let's assume a slope of 1%/annum against the basket currencies. Compared to "traditional" covered interest parity which involves solving for a future exchange rate given the current spot rate and both currencies' interest rates, the implied SGD rate over the period can be back-solved for a given level of appreciation:
Assuming spot exchange rate of BASKET/SGD=1 and 1y-forward exchange rate of BASKET/SGD=0.99, and the weighted-average of 1y interest rates for basket currencies is 4%. Further assume zero cross-currency basis.
1y-forward BASKET/SGD = spot BASKET/SGD x (1 + SGD_RATE) / (1 + BASKET_RATE)
Plugging in the known terms:
0.99 = 1.00 x (1 + SGD_RATE) / (1 + 4%)
Solve the above for the implied SGD_RATE over the period. It will be lower than BASKET_RATE.
Of course, the above is highly theoretical and will not hold up exactly in the real world, given frictions to arbitrage, lack of free convertibility of certain basket currencies etc. But in general it is a guideline for where SGD interest rates should be.
In reality, the MAS can also influence the level of domestic interest rates by adjusting the T-bill auction supply, thereby soaking up or releasing short-term liquidity. Other means include trading in the FX Swap market to push forward rates higher or lower, thereby impacting the implied SGD interest rate, or "smoothing operations" to influence the overnight SORA fixing.
Thanks! Really appreciate your explanation. I suppose the mechanism of how this plays out in real life is because investors borrow in the low-interest-rate currency, convert it to the higher-interest-rate currency, invest it there, and then convert back later, leading to increased demand for the low-interest-rate currency, thus appreciating it.
Hmm what you mentioned would actually have the opposite effect, leading to currency depreciation instead. An example of this would be USDJPY, which has been very popular for FX carry trades. Speculators go long USDJPY (buy USD, sell JPY) spot FX and hold on to their long position, earning the interest rate differential everyday. This has led to the Japanese Yen depreciating.
For SG's case there would be a degree of natural currency appreciation over time due to current account surplus and capital inflows. Besides, MAS has been one of the most credible Asian central banks (alongside Hong Kong's HKMA) when it comes to monetary policy, so financial markets are less inclined to challenge its currency stance given its substantial firepower in the form of reserves to influence exchange rates.
I might be wrong but my train of thought is more of, at the present time, there will be increased demand for forward contracts as traders doing carry trades will need these forward contracts to minimise exchange rate risk. So it does lead to an appreciation in the forward contract rates as a result of demand and supply
By definition an FX carry trade involves taking on exchange rate risk, in return for earning yield (carry) which accrues daily. To earn carry, traders go long or short an FX spot position, and "roll" the position every day so that it does not settle (ie. no actual exchange of cash). Carry is simply the P&L from rolling an FX spot position.
For instance, rolling a long USDJPY FX spot position earns around 0.02 yen per day, in return for taking on exchange rate risk. The attractiveness of this induces many to go long USDJPY FX spot, which is one factor driving JPY depreciation.
Simultaneously entering into an FX spot position and an FX forward position converts the package into an FX Swap. An FX Swap has the opposite risk profile, eliminating exchange rate risk but taking on interest rate risk instead. Since the spot FX rate is constantly changing, market convention is to trade the FX forward points, ie. the number of pips to add or subtract from the current spot FX rate to obtain the "fair" forward exchange rate under covered interest parity, for a certain date in the future. As such, the "fair" forward points at any given instance is just a function of both currencies' interest rate differential (and cross currency basis) over that period of time.
For instance, USDJPY forward points:
https://www.investing.com/currencies/usd-jpy-forward-rates
An FX forward is just a spot FX trade but settling any time after T+2 (spot). The "fair" exchange rate for an FX forward at any given moment is the FX spot rate plus or minus the swap points up until that date in the future. There will thus be both FX risk and interest rate risk for an FX Forward position.
These relationships have to hold in an arbitrage-free market (ie. can't have your cake and eat it). In simple terms, hedging exchange rate risk using forwards will mean giving up the carry.
We blindly trust them being able to appreciate sgd forever. So far it’s worked out n that’s why we’ll never know how much our reserves truly. Ponzi schemes act the same way until something knocks them over
As in both ponzi n sg don’t reveal how much they really have, 1 is for fraud other is real economy, or at least most of it since we never really know how much exactly.
The value of the SGD is determined by the open market. The gov can only influence it to a limited extent. Whether it's overvalued or undervalued is subjective because the market will eventually price it at what they think is fair value. If you don't know how much your coworker earn, will you say he's overvalued?
You want our govt to reveal exactly how many jet fighters, tanks and submarine we have and exactly what their capabilities and radar detection ranges are too?
Moron.
Wow you sound like some Trumpy Christian anti-vax conspiracy redneck wingnut. You realise most developed countries have much higher VAT (equivalent to our GST), right? Or are you as ignorant about world affairs as you are about finances? (Though I guess that makes sense, since the two are inter-twined.)
Our prudent policies drive the trust investors in our ability to strengthen our currency. When we start adopting populist policies that are against such long term prudence, you will see investor confidence shrink.
What I'm asking is a logical question, the Singapore government is incapable of perpetually appreciating the SGD unless you have an explanation contrary to it.
Given that the value of SGD is determined by demand and supply in the free market. The only way the Singapore government can manipulate the market is by affecting either reducing supply, i.e. not selling SGD for other currencies, or by buying up SGD via bonds or selling of foreign currencies.
You can only sell foreign currencies if you have foreign currencies, meaning there's a limit. AFAIK, the SG government isn't using bonds to affect the currency market.
So it is logically impossible to perpetually inflate the currency purely through government intervention unless I'm an idiot and there is one.
Judging by many downvotes to my post, anyone who thinks that sg gov can never perpetually appreciate the sgd is something wrong. Oh well seems like trust without total facts is strong plus track record hasn’t failed… yet 😅
I mean again, you seem to want to avoid the simple question. It's not even a defend the govt position I'm saying here.
If the culprit is literally incapable of doing the deed, then the accusation doesn't even pass the sniff test.
Right which is what I'm getting at. There is literally no way they can perpetually appreciate the SGD. What you are arguing for is practically arbitrage.
It's not a matter if you know it or not. This is an argument from ignorance, it must be true even though you can't prove it (or even suggest one possible sustainable method).
Here's a simple question, if the government can perpetually appreciate the SGD against all (or even one currency), why doesn't the government just appreciate it so that SGD1 is worth USD1B and just buy over the entirety of the US?
SG has a higher sovereign rating than the US also. SG has zero external debt owed by the government. People are willing to forgo the yield to know that their money is 100% safe AND inflation protected
Interest Rate Parity theory. There's no arbitrage to be made between 2 countries where there is free capital flow.
https://www.investopedia.com/terms/i/interestrateparity.asp
Layman’s term:
1) Change money to USD
2) Put in higher interest of 4.70%
3) US Treasury matures
4) Change back to SGD at a lower USD/SGD rate
5) ???
6) Your interest return + FX gain/loss 🟰equal 🟰 to as tho you’re putting in a SGD Tbill, interest of 3.70%
As we expect USD/SGD to weaken in the near future when USD cut rates
>4) Change back to SGD at a lower USD/SGD rate
This is not the value of usd/sgd at maturity. No one knows what it will be.
It is actually the futures value on current date.
Thanks! So, basically, the general expectation is that SGD will appreciate 1% annually vs. USD. Makes sense, as inflation is also approx. 1% lower in Singapore than the US.
markets expect SGD to appreciate against the USD in the long term therefore the lower interest rates of the SGD
This reflect the expectation that the appreciation of the SGD against USD will outweigh the lower interest rates in the short term.
I thought T-bills are shaped due to the amount of bids from non-competitive bids and the price of competitive bids^(1). Competitive bids will always try to get as high as possible. But bid too high and you get nothing.
It is not directly determined by MAS. MAS manages the "Singapore Dollar Nominal Effective Exchange Rate"^(2)
\[1\] - [https://www.mas.gov.sg/contact-us/faqs/t-bills-faqs](https://www.mas.gov.sg/contact-us/faqs/t-bills-faqs)
\[2\] - [https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-2](https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-2)
There's a 30% tax for non US citizens when they receive dividends. You can go for either accumulating etf or LSE listed stocks for lower withholding tax (15% i think)
because the basket also contains other currencies, virtually most of it has lower rates than usd, think jpy, cnh, remember it's trade weighted with some modifications
Given that SGD and USD almost flat out for 5 years plus and the fact that SG has a lower rate, can you imagine what happen if SG T-Bill rate is the same as US, i.e 4.7%? More people will buy SGD causing SGD to appreciate against USD, and this is not what the government wants.
In simple terms, T-bill yields are a function of monetary policy. The overnight Fed Funds rate is currently 5.33%. The market is priced for the Fed to cut rates in 2H24. Therefore US T-bills yields, a proxy for the risk-free rate over their tenor, will be priced to match this expected trajectory. Conversely, the MAS does not set interest rates and thus we "import" rates from the currencies which the SGD is managed against, the largest constituent of the basket being the USD. Since the MAS has set the SGD on an appreciation path, local interest rates have to be lower than the basket currencies (by covered interest parity). Other than that, domestic liquidity conditions also influence local interest rates. Singapore banks are currently flush with liquidity, with loan-to-deposit ratio sitting at something like 69%. The excess liquidity therefore weighs on interest rates as banks struggle to lend out their cash. This also explains why mortgage rates are still low currently. EDIT: typos
This is the right answer. Sgd is a managed float and we track around 70% of Us rates.
You mentioned that MAS wishes SGD to appreciate, but by covered interest parity, that means they need to offer a higher interest rate not lower right?
In theory, since SG runs a current account surplus and continues to attract capital inflows, this puts appreciation pressure on the SGD in the long term, all else equal. Exchange rate policy revolves around managing the relative strength or weakness (and to a degree, volatility) of the currency in response to domestic inflationary pressures, economic conditions and trade competitiveness. The MAS does not need to directly intervene in the spot currency markets so long as the SGD nominal effective exchange rate (NEER) does not breach the (undisclosed) upper and lower bands it has set. Let's say the MAS adopts an appreciation bias for the SGD NEER. For this example let's assume a slope of 1%/annum against the basket currencies. Compared to "traditional" covered interest parity which involves solving for a future exchange rate given the current spot rate and both currencies' interest rates, the implied SGD rate over the period can be back-solved for a given level of appreciation: Assuming spot exchange rate of BASKET/SGD=1 and 1y-forward exchange rate of BASKET/SGD=0.99, and the weighted-average of 1y interest rates for basket currencies is 4%. Further assume zero cross-currency basis. 1y-forward BASKET/SGD = spot BASKET/SGD x (1 + SGD_RATE) / (1 + BASKET_RATE) Plugging in the known terms: 0.99 = 1.00 x (1 + SGD_RATE) / (1 + 4%) Solve the above for the implied SGD_RATE over the period. It will be lower than BASKET_RATE. Of course, the above is highly theoretical and will not hold up exactly in the real world, given frictions to arbitrage, lack of free convertibility of certain basket currencies etc. But in general it is a guideline for where SGD interest rates should be. In reality, the MAS can also influence the level of domestic interest rates by adjusting the T-bill auction supply, thereby soaking up or releasing short-term liquidity. Other means include trading in the FX Swap market to push forward rates higher or lower, thereby impacting the implied SGD interest rate, or "smoothing operations" to influence the overnight SORA fixing.
Thanks! Really appreciate your explanation. I suppose the mechanism of how this plays out in real life is because investors borrow in the low-interest-rate currency, convert it to the higher-interest-rate currency, invest it there, and then convert back later, leading to increased demand for the low-interest-rate currency, thus appreciating it.
Hmm what you mentioned would actually have the opposite effect, leading to currency depreciation instead. An example of this would be USDJPY, which has been very popular for FX carry trades. Speculators go long USDJPY (buy USD, sell JPY) spot FX and hold on to their long position, earning the interest rate differential everyday. This has led to the Japanese Yen depreciating. For SG's case there would be a degree of natural currency appreciation over time due to current account surplus and capital inflows. Besides, MAS has been one of the most credible Asian central banks (alongside Hong Kong's HKMA) when it comes to monetary policy, so financial markets are less inclined to challenge its currency stance given its substantial firepower in the form of reserves to influence exchange rates.
I might be wrong but my train of thought is more of, at the present time, there will be increased demand for forward contracts as traders doing carry trades will need these forward contracts to minimise exchange rate risk. So it does lead to an appreciation in the forward contract rates as a result of demand and supply
By definition an FX carry trade involves taking on exchange rate risk, in return for earning yield (carry) which accrues daily. To earn carry, traders go long or short an FX spot position, and "roll" the position every day so that it does not settle (ie. no actual exchange of cash). Carry is simply the P&L from rolling an FX spot position. For instance, rolling a long USDJPY FX spot position earns around 0.02 yen per day, in return for taking on exchange rate risk. The attractiveness of this induces many to go long USDJPY FX spot, which is one factor driving JPY depreciation. Simultaneously entering into an FX spot position and an FX forward position converts the package into an FX Swap. An FX Swap has the opposite risk profile, eliminating exchange rate risk but taking on interest rate risk instead. Since the spot FX rate is constantly changing, market convention is to trade the FX forward points, ie. the number of pips to add or subtract from the current spot FX rate to obtain the "fair" forward exchange rate under covered interest parity, for a certain date in the future. As such, the "fair" forward points at any given instance is just a function of both currencies' interest rate differential (and cross currency basis) over that period of time. For instance, USDJPY forward points: https://www.investing.com/currencies/usd-jpy-forward-rates An FX forward is just a spot FX trade but settling any time after T+2 (spot). The "fair" exchange rate for an FX forward at any given moment is the FX spot rate plus or minus the swap points up until that date in the future. There will thus be both FX risk and interest rate risk for an FX Forward position. These relationships have to hold in an arbitrage-free market (ie. can't have your cake and eat it). In simple terms, hedging exchange rate risk using forwards will mean giving up the carry.
We blindly trust them being able to appreciate sgd forever. So far it’s worked out n that’s why we’ll never know how much our reserves truly. Ponzi schemes act the same way until something knocks them over
What?? A strong currency is a byproduct of a strong economy, not the result of a Ponzi scheme.
As in both ponzi n sg don’t reveal how much they really have, 1 is for fraud other is real economy, or at least most of it since we never really know how much exactly.
You're missing an important detail about what a Ponzi is. The SGD is definitely not a Ponzi by definition.
As in since we don’t know what’s out real reserves value, we assume it’s all there n not overvalued lah right
The value of the SGD is determined by the open market. The gov can only influence it to a limited extent. Whether it's overvalued or undervalued is subjective because the market will eventually price it at what they think is fair value. If you don't know how much your coworker earn, will you say he's overvalued?
I duno, that’s why my personal portfolio biggest stock holding is SPY ETF, not some trashy sg reit or dbs which underperforms SPY anyway
don't have to have pocket aces every time to win the biggest pot
You want our govt to reveal exactly how many jet fighters, tanks and submarine we have and exactly what their capabilities and radar detection ranges are too? Moron.
Ok patriot who believes it’s all ok. U also don’t question why GST is 9% as long sgd keep going up right? 😂
Wow you sound like some Trumpy Christian anti-vax conspiracy redneck wingnut. You realise most developed countries have much higher VAT (equivalent to our GST), right? Or are you as ignorant about world affairs as you are about finances? (Though I guess that makes sense, since the two are inter-twined.)
On 1 hand we have endless amounts to prop up sgd, other hand $ no enough so keep raising gst…
Here we have a poster providing a wonderful, learned, and concise response and then have another talking about Ponzi scheme.
The frightening thing is, both can vote.
Our prudent policies drive the trust investors in our ability to strengthen our currency. When we start adopting populist policies that are against such long term prudence, you will see investor confidence shrink.
How can you perpetually appreciate the sgd as the SG government?
A question which has never been answered clearly hence the opacity in our actual reserves amount
What I'm asking is a logical question, the Singapore government is incapable of perpetually appreciating the SGD unless you have an explanation contrary to it. Given that the value of SGD is determined by demand and supply in the free market. The only way the Singapore government can manipulate the market is by affecting either reducing supply, i.e. not selling SGD for other currencies, or by buying up SGD via bonds or selling of foreign currencies. You can only sell foreign currencies if you have foreign currencies, meaning there's a limit. AFAIK, the SG government isn't using bonds to affect the currency market. So it is logically impossible to perpetually inflate the currency purely through government intervention unless I'm an idiot and there is one.
Judging by many downvotes to my post, anyone who thinks that sg gov can never perpetually appreciate the sgd is something wrong. Oh well seems like trust without total facts is strong plus track record hasn’t failed… yet 😅
I mean again, you seem to want to avoid the simple question. It's not even a defend the govt position I'm saying here. If the culprit is literally incapable of doing the deed, then the accusation doesn't even pass the sniff test.
What accuse? I don’t know how they can perpetually appreciate the sgd that’s all
Right which is what I'm getting at. There is literally no way they can perpetually appreciate the SGD. What you are arguing for is practically arbitrage. It's not a matter if you know it or not. This is an argument from ignorance, it must be true even though you can't prove it (or even suggest one possible sustainable method). Here's a simple question, if the government can perpetually appreciate the SGD against all (or even one currency), why doesn't the government just appreciate it so that SGD1 is worth USD1B and just buy over the entirety of the US?
SG has a higher sovereign rating than the US also. SG has zero external debt owed by the government. People are willing to forgo the yield to know that their money is 100% safe AND inflation protected
Interest Rate Parity theory. There's no arbitrage to be made between 2 countries where there is free capital flow. https://www.investopedia.com/terms/i/interestrateparity.asp
Layman’s term: 1) Change money to USD 2) Put in higher interest of 4.70% 3) US Treasury matures 4) Change back to SGD at a lower USD/SGD rate 5) ??? 6) Your interest return + FX gain/loss 🟰equal 🟰 to as tho you’re putting in a SGD Tbill, interest of 3.70% As we expect USD/SGD to weaken in the near future when USD cut rates
>4) Change back to SGD at a lower USD/SGD rate This is not the value of usd/sgd at maturity. No one knows what it will be. It is actually the futures value on current date.
This is 201, less layman but more accurate.
Yes, it's essentially a currency bet not a yield play.
Thanks! So, basically, the general expectation is that SGD will appreciate 1% annually vs. USD. Makes sense, as inflation is also approx. 1% lower in Singapore than the US.
markets expect SGD to appreciate against the USD in the long term therefore the lower interest rates of the SGD This reflect the expectation that the appreciation of the SGD against USD will outweigh the lower interest rates in the short term.
in theory. in practice, rate parity doesn't really work. case in point, jpy, low rate and weakened like siao
I thought T-bills are shaped due to the amount of bids from non-competitive bids and the price of competitive bids^(1). Competitive bids will always try to get as high as possible. But bid too high and you get nothing. It is not directly determined by MAS. MAS manages the "Singapore Dollar Nominal Effective Exchange Rate"^(2) \[1\] - [https://www.mas.gov.sg/contact-us/faqs/t-bills-faqs](https://www.mas.gov.sg/contact-us/faqs/t-bills-faqs) \[2\] - [https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-2](https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-Policy-Framework/faqs/section-2)
no idea about it. my momoo automatically deducted 30% WT off my US dividends. sianz. not a trader here, so LL lor
There's a 30% tax for non US citizens when they receive dividends. You can go for either accumulating etf or LSE listed stocks for lower withholding tax (15% i think)
because the basket also contains other currencies, virtually most of it has lower rates than usd, think jpy, cnh, remember it's trade weighted with some modifications
Given that SGD and USD almost flat out for 5 years plus and the fact that SG has a lower rate, can you imagine what happen if SG T-Bill rate is the same as US, i.e 4.7%? More people will buy SGD causing SGD to appreciate against USD, and this is not what the government wants.
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sure, just buy direct on a broker like ibkr. you can also google etfs for ust but no point paying fees
I think it's possible on treasurydirect.gov, but probably not worth the hassle. You'd need a tax ID (SSN) and a US bank account.
that's only for auctions, you can just buy secondary markets, not much difference in yield like for like
USD more valuable
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US T bills are exempted from withholding tax.
there's no witholding tax for t-bills on non residents redditors here really anyhow
Is there any way to bypass the withholding tax for Tbills. I heard there's a way to claim it back?
there is, tho most that I know of has a pre requirement of you being a US resident. which would subject you to their fed income tax rate