Following which, there has been significant repricing lower in US long bond yields by around 48 basis points from as high as 4.79% in mid-January to the latest close of 4.31%.
Historically, in Asia, rising US bond yields have coincided with an outperformance of Singapore banks over Singapore REITS – and vice-versa.
"While a US recession is not Nomura’s base case and thus our economists do not expect the Fed to cut rates, we think the market, in the near-term, may still remain concerned about a potential US slowdown, thereby maintaining downward pressure on rates and consequently on sectors that are perceived by the market to be beneficiaries of high-for-longer rates such as Singapore banks," the analysts state.
"Should US recession concerns build up in a scenario of significant trade tensions leading to a sustained fall in long-end bond yields alongside Fed rate cuts, then Singapore banks may become more vulnerable to sustained underperformance.
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"Historically, Singapore banks tend to outperform SREITS when US rates are rising – and vice versa.
With US bond yields rising, the valuation premium measured in P/B of SG banks over SREITS has also expanded.
"However, assuming US recession concerns build up and, with that, US 10-year rates come off, we think there is scope for a tactical outperformance of SREITS over Singapore banks especially in the wake of the solid outperformance of SG banks over SREITS," state the Nomura analysts.
