A slight disappointment this week, my 3 month SOR pegged home loan repricing kicked in on 2nd Dec rather than 1st Dec as i thought was going to be the case. That meant the SOR rate was 0.98% instead of 0.8% that i had hoped for. Nevertheless, my SOR pegged home loan rate was slashed from 1.86% to 1.63%.
Lesson learned: the repricing date for SOR or Sibor pegged loans is always exactly 3 months after the previous repricing date. Since the previous round of repricing took place on 2nd Sep, the date for the current round has to be 2nd Dec, unless 2nd Dec falls on a weekend (which it doesn’t) in which case the repricing date will fall on the next working day. So if your SOR or Sibor pegged home loan began on the 1st of the month, you may see subsequent repricing date pushed to later days in the month as time goes by.
In the past week, SOR and Sibor have been steadily rising, and one wonders, how does this correlate with the interest rate cuts implemented by central banks worldwide? Going by the two determinant factors of SOR – USD interest rate and USD/SGD exchange rate, and given that USD interest rate is generally trending lower, this could be pointing to current expectations of higher USD/SGD forward exchange rates.
There is another huge trend that is taking place now – the flight to treasuries. More on this later..
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Frequently asked question: what is SOR (Swap Offer Rate) and how it works. The concept of a swap is not quite easy to grasp. The best description available on how the SOR, in particular, works is this discourse by SGX on the SOR pricing model. Here are some excerpts:
The SOR represents the effective cost of borrowing SGD synthetically through borrowing USD for 3 months and swap out the USD in return for SGD for the same maturity.
In simple terms, SOR is the projected interest rate it costs you if you borrowed the same amount of money in USD instead.
The Association of Banks in Singapore (ABS) determines the fixing of the 3-month SOR. The ABS models the administration of its fixing rates after the well-established procedures of the British Bankers Association (BBA) in their London Inter-bank Offered Rate (LIBOR) fixing. In this regard, the ABS selects a panel of contributor banks and determines the fixing procedures, on the basis of full transparency and accepted market convention. The SGD SIBOR, USD SIBOR and SOR are fixed daily at 11.00 am Singapore time. The value date for the interest rate fixings is two business days after the fixing date. Telerate, a division of Bridge, is appointed the Calculating Agent and Distributor, and the daily Fixing Rates will be concurrently available to all other information services vendors.
An adaptation of the pictorial presented in the discourse on how SOR works:
SGDF1 = USD/SGD Foreign Exchange forward
SGDF2 = USD/SGD Foreign Exchange forward
USDIRF = Forward USD Interest Rate for the underlying SOR tenor
At the beginning of the 3 month period (note that these ‘actions’ are synthetic), borrow USD at USDIRF and immediately convert it to SGD at SGDF1 and invest the proceeds. At the end of the 3 month, convert the proceeds from SGD investment to USD at SGDF2 and settle the USD borrowing. This gives rise to the following formula for deriving SOR:
whereby Act = Actual number of days in the 3 months
Based on this formula we can deduce the following 2 general principles
- SOR is higher when USD interest rate is higher
- SOR is higher when USD is expected to rise against SGD
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At the closing of this week, the 3 month and 6 month SOR fell to an eye-popping 0.68% and 0.74% respectively, the lowest levels since i started tracking, while the 3 month Sibor tumbled to 0.81%. The fall in the 6 month SOR is especially noteworthy, as it convincingly fell below 1%. This could possibly be taken as a signal that SOR will remain subdued for the next 6 months.
These development could be a direct result of deliberate effort on the part of central banks around the world, especially the Federal Reserve, to lower rates, to make available more money in the hands of people for spending. It was announced earlier this week, Fed, Treasury offer US$800b more to credit markets and in similar fashion, EU launches US$259b stimulus package. Quoting from the news article: “The initiatives call for up to 600 billion dollars in Federal Reserve purchases of mortgage securities, and a separate 200 billion dollars for asset-backed securities to help get credit to consumers”. What this really sounds to me is writing off bad debt and giving people money to spend without having to work for it. The German Chancellor, Angela Merkel, holds a more cautionary stance and warned “against a ‘race’ between European states over the size of their stimulus measures”. Europe demonstrates that they are more conservative as “the EU package remains dwarfed by similar measures taken in the United States”. So far, U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit.
The price to pay for increasing money supply is of course inflation and devaluation of the currency. Here is a prediction chart (take with a pinch of salt) suggesting that the SGD/USD exchange rate will peak in Jan 2009 and fall back to previous lows by Jun 2009. Coming back to home loans, what all these means is, do take advantage of the low interest rates now if you can, while at the same time, keep a close watch of economic trends, such as exchange rates whereby interest rates (relative to elsewhere) *usually* move in tandem with the currency value. Remember to plan at least 2 months in advance if you wish to do refinancing or re-pricing.
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A belated post this is, an update since my last post on making coffee with frothy milk, and i must say i have gotten better at making better coffee, especially better froth. My conclusion is that it does not really demand a lot of skill (unless you are really particular about your coffee), so take heart those of you just getting started.
On making froth, the most important factor seems to be the choice of milk. So far the one from Magnolia works for me and i have been able to consistently get decent froth from it. To make a cup of coffee, i use half a glass of freezer cooled milk (~120ml) and dip the steam wand two thirds deep into the milk. When it is working well, there will be a deep sounding whirr (in contrast to a high pitch sound which usually ends up not producing good froth). As for the espresso, it makes a difference when the coffee powder is tamped down hard, resulting in stronger and richer coffee. I get a decent enough cafe latte, but i must say it can never beat those from Spinelli, which is still my favourite. Next idea to try, a coffee bean grinder..
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Sibor and SOR rates seem to be consolidating and staying low this week, both (3-month rates) maintaining below 0.9% consecutively for the last 3 days. There is perhaps a lack of driver, with Libor rates (3m USD) hovering around 2.15% – 2.30% and USD/SGD exchange rates holding at 1.53 for now. News of impending Fed Funds Rate cut, possibly to 0.5%, might just help to keep Sibor and SOR below 1% for the months ahead.
Meanwhile, we are seeing more signs of the recessionary economic landscape, with pay cuts at Temasek, fall in top civil servants’ pay, falling private home prices, $2 COE, among other interesting news reported the past week. It is also interesting to note that more advertisements are being put up for luxury items such as high-end cars. There is indeed cause for worry as none will be spared, but lets not forget happiness is a choice.
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This week, Sibor fell to 0.89 percent, not far from the all-time low of 0.69 percent recorded on Nov 21, 2003. The 3m and 6m SOR touched lows of 0.78 and 0.94 respectively. Coupled with the expected weakness in the currency, the interest rates here will likely stay low for some time as anticipated. Good news for SIBOR or SOR pegged mortgagers.
Nevertheless, taking cue from Libor, risk aversion could kick in and cause a spike at any time. Another thing to watch out for is inflation. Should it return, we will see rates headed up again.
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Looks like it started to hit home in a big way – DBS cuts 900 jobs. Earlier on Chartered Semiconductor implemented temporary salary reductions of 5-20 percent. Elsewhere in the world, AMD lays off 500 staff, Nokia Slashes 600 Jobs, HSBC cuts 1100 and the list goes on.
Central banks are slashing interest rates in the race to zero, but face “an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it”. The problem can only get worse in a vicious cycle of people losing jobs, cutting back on spending and companies going out of business. My fellow blogger lowem calls it “falling off the cliff”.
On a positive note for home owners, interest rates are falling. SOR has fallen to the lowest levels. In a time like this, perhaps the best, or the only thing you can do, is to hang on to your job (and house), save as much as you can and not forgetting to enjoy life for what it is.
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Looks like the days of low interest rates are here: the 6 month SOR has fallen to 1.16%, the lowest level since i started tracking. If interest rates remain subdued, i should expect more savings yet again when my home loan interest, which is pegged to the 3 month SOR, is due for revision again. The timing couldn’t have been better – i’ve managed to escape the spike in interest rates brought about by the worldwide credit crunch.
Here are excerpts from articles on rate cuts:
- Interbank rates have tumbled worldwide as central banks slashed interest rates
- The London interbank offered rate, or Libor, for three- month U.S. dollar loans, slid 15 basis points yesterday to 2.71 percent, the lowest level since June 9
- The European Central Bank and Bank of England will cut their key rates by 50 basis points
- Central banks in Australia, China, Hong Kong, India, Japan, South Korea, Taiwan and Vietnam all announced rate cuts since the start of last week
- A thawing in money markets is causing a rally in short-end rates, leaving the door open to further declines in the swap rates
However, banks may not pass all of the benefits of lower interest rates on to consumers and businesses.
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Here’s the comparison chart of LIBOR vs SIBOR
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