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The bifurcation between SORA OISs and SGS yields is unlikely to be sustained. Over the past few weeks. SGD rates characterised by two developments – SORA OISs rising sharply and SGSs staying rich (relative to swaps and to USTs). We think this is because the market participants in each space may have different considerations. SGSs investors may be more concerned with the lack of supply. Conversely, traders in the SORA space may be more sensitive to speculative bets that short-term SGD rates may rise. We lay out our thoughts below.
One, the rise in SGD OISs look stretched. In absolute terms, it may be tough for 5Y SORA to decisively breach 2% on a sustained basis. We are also wondering if the implied forward rates may be factoring in a too aggressive pace of SORA increases (versus SOFR declines as the Fed cuts). A rethink would be warranted if there were signs of outflows / tightness that may materially shift short-term SGD rates higher.
Two, SGSs still look very expensive relative to swaps but this should change. This is a combination of lack of SGS supply in 4Q keeping yields depressed and likely overstretched SORA OIS levels from paying flows over the past few weeks. This phenomenon appears more pronounced in the longer tenors. SGS underperformance is likely as issuances kick off, starting with a 5Y reopen on 28 January.
In short, we think paying flows in SORA could slow as levels get elevated while SGSs would get cheaper as supply comes back into the picture. 
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