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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As was widely anticipated, the Feds have dropped the Fed Funds Rate to 1%. Rate cuts, coupled with other measures, seem to be gaining some traction at lowering LIBOR rates to which more than $360 trillion of financial products are tied. SIBOR seems to trend lower while SOR continues to oscillate. As central banks worldwide continue to cut rates (with few exceptions, if any, other than Iceland), interest rates in general should remain relatively low. Analysts are even speculating that the Feds could drop rates to zero percent.
Speaking of low interest rates, i received calls from two banks just today and yesterday offering to loan money at zero interest for 3 months. One bank even offered to waive the administrative fee they typically charge for the so-called zero interest loans. Seems to me banks are desperate to get money out their door, which makes me wonder if there has been an increase in money supply? My fellow blogger lowem notes that “M3 money supply growth has bottomed out in recent months and are on an up-trend again” and concluded that inflation is going to “roar back with a vengeance”. This might just be the case unless Japanese style deflation takes place, watch out..
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Continuing the wild ride of the past few weeks, SOR began the week at 1%, soaring to 2.11% mid-week and finishing the week at 1.63%. SIBOR was slightly less volatile, ranging between 1.38% and 1.63%.
The most watched Libor rate logged its first weekly drop since July, coming in at 2.92 percentage points above the Fed Funds Rate. Libor is expected to decline about 2 percent in the weeks to come.
Meanwhile, home prices in Singapore fell in the third quarter for the first time in more than four years, the FTSE Straits Times Real Estate Index dropped 56 percent this year and rentals are starting to fall. The recession looks set to hit the property market badly. Home owners may get to enjoy lower mortgage rates if further rate cuts come. This is already seen to be happening in Australia where rates were cut by a full percentage point by the Reserve Bank of Australia.
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The Federal Reserve cut the Fed Funds Rate from 2% to 1.5% ahead of the FOMC meeting at the end of the month in a coordinated effort with the European Central Bank, the Bank of England and central banks in Canada, Switzerland and Sweden. This was to ease the economic effects of the worst financial crisis since the Great Depression.
The rate cut did not have an immediate effect, however, as markets continued to tumble across the world and the London interbank offered rate (Libor) rose to its highest levels. Libor is said to determine rates on $360 trillion of financial products worldwide, from home loans to derivatives. There are signs that Libor will ease off, but for the mean time, the target rate mechanism is broken.
In Singapore, SIBOR and SOR have eased off after spiking. For a short time, an inverted yield curve was seen on the daily domestic interbank rate, paralleling what was happening elsewhere.
When the markets stabilize, we should see things returning to their normal course of action, and that means lower home loan rates given that global interest rates are down with possibly more cuts in the pipeline.
Meanwhile, analysts say retrenchments are expected as early as December, so brace yourselves as this financial turmoil really hits home.
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The past few days have been the most volatile on all financial fronts, be it equities, exchange rate or interest rates. In Singapore, the 3 months SIBOR spiked to 2.23% due to “spillover from the US funding freeze and also the increase in risk aversion in the local interbank market”. The Monetary Authority of Singapore (MAS) had increased liquidity in the local money market in their effort to keep SIBOR in check.
Changes to the SIBOR directly affects home owners who have opted for loans pegged to it. The rise in SIBOR have resulted in more opting to peg their loans to the 12 months SIBOR. While this may protect them from further increase in the interest rate, it also prevents them from enjoying lower interest rates should it fall in the near future. SIBOR could decline to 1% and remain around that depressed level for most of next year.
Indicators are foretelling further cuts to the Fed Funds Rate as the US scrambles to make credit available. Economists argue that “besides lowering rates, the Fed may not have many options beyond further expanding emergency lending programs or creating new ones”. Asia’s central banks have started to cut interest rates, including Taiwan and China. Perhaps we will see SIBOR and SOR ease off more soon.
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There has been a lot of volatility in the SOR and SIBOR the past few days, reacting to the jump in LIBOR as people are “afraid to lend to one another”. The 3 month SOR has broken through the previous high of 1.63 to hit 1.7, since i started tracking it in April. This is in somewhat divergent from the recent report that mortgage rates are still at rock bottom.
The picture will be clearer after the dust has settled on the financial crisis that has erupted in the US, except that we don’t know when and what surprises may still come our way. My guess is that the appreciation in swap rates will be moderate. An analyst expects swaps to come off due to slowing economic growth and a tougher business climate. This, coupled with slowing demand for properties seems to have already triggered off competition among banks for the housing loan market, as evidenced by MayBank’s new offering.
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With the collapse of Lehman Brothers, many were wondering if the Feds will cut their target rates to help keep credit flowing. The FOMC decided to keep rates at 2%. However, the Fed’s statement is interpreted as a “signal it will consider a reduction in the future by acknowledging in its statement that strains in financial markets are increasing.” For a moment predictions showed a marked increase in the probability of the Fed Funds Rate falling to 1.75% but the probability fell immediately after the Feds Funds Rate were held steady.
While the Fed Funds Rate remained at 2%, actual loan rates may be a different story as “the cost of money has risen sharply above the Fed’s 2% target.” Banks have increasingly tightened credit since the sub-prime woes. Local interest rates in Singapore have been more or less stagnant for the past month or so. If it continues to have strong correlation to the Fed Funds Rate then the rates should continue to hover at current levels. However, given the drastic changes in the financial system in the US and its repercussions to the rest of the world, nobody can say for sure what will happen tomorrow. It may well turn out to be a complete meltdown, or hyperinflation or just a recession. Even as i am writing this, gold has just shot up 60 dollars, proving itself indeed to be the ultimate store of value.
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I should be expecting a letter from my bank soon, telling me that the interest rate chargeable on my housing loan will be revised to 1.9%, with effect from September 1. This is a second time win for me, having my housing loan interest rate shaved by another 0.1%.
Predictions for the Fed Funds Rate tell us that it looks set to remain at 2% at least until October. Beyond that, “Federal Reserve policy makers agreed this month that their next change in interest rates will be to raise them.”, but we’ll have to wait till the next FOMC meeting announcement to get further clues on when the raise might come. Another factor to consider is the strengthening of the US dollar. The US dollar is still trending up against the Singapore dollar and interest rate parity suggests that interest rates in Singapore will fall as a result, which indeed seems to be the case for now.
Will i still get favourable rates come December when my SOR pegged home loan rates are revised again? I certainly hope so. Short term loan rates such as the 3 months SOR or SIBOR rates should have a good chance of staying lower than the 2 or 3 years fixed rates or floating rates, even after accounting for the1% interest rate banks typically charge on top of SOR or SIBOR. However, if interest rates were to appreciate sharply then i would have lost out on the opportunity to lock-in the current rates. Hopefully i can enjoy reasonable rates for at least the next 2 years with the SOR pegged home loan.
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