MAS has just announced it will “increase the slope of its policy band slightly for a modest and gradual appreciation of the Singapore dollar”. Two days before the announcement, the USD/SGD rate already started to decline from the recent high of 1.26. This bodes well for home loan rates, where SOR has already fallen below Sibor for 3 weeks. Given the Fed’s apparent commitment to keep rates low through 2014, which is actually just a forecast and not set in stone, it appears that interest rates will probably remain subdued for a while at least. Meanwhile, despite repeated attempts to suppress oil price, it managed to stay above US$102. This could be a sign of QE3?
The London Interbank Offered Rate (Libor) came into the limelight recently. As mentioned in the news articles, the US Dollar Libor affects the cost of borrowing $10 trillion worth of loan and another $350 trillion in derivatives. The Libor rate is determined from the submission of “designated contributor banks”, and this is a completely arbitrary process carried out by the individual banks, in which the responsibility ultimately lies in the hands of a bunch of people. It comes as no surprise at all that they now came under investigation for manipulating the rates.
If you didn’t already know, SIBOR and SOR works in the same way, though, SOR is supposed to follow a mathematical formula, which ultimately is still based on a USD interest rate, which could be a figure plucked out of thin air. I would presume that the banks, having been spooked by negative SOR, would now look very carefully at the derivation of the SOR rates and do all that is in their means to ensure they are not on the loosing end.
SOR rises above 0.5% for the first time since June 2010, as the USD/SGD moves close to 1.3 again and LIBOR hit 0.54% on its continued steep incline, while SIBOR remains muted at 0.38%. The massive flight-to-safety from the Eurozone’s trouble pushes the US dollar higher as investors piled into Treasuries. This, the result of ECB’s stubborn unwillingness to print money, though, as widely expected, they did further cut rates by another quarter points to 1%.
Their American counterparts are, on the other hand, expected to start a new round of Quantitative Easing aka money printing, to cushion the weakening economy. Central banks around the world are also expected to reduce borrowing costs to help with the slowing economy. Just a wild guess, but this might explain the relatively lower SIBOR.
At this point, interest rates are still low by historical standards, so there should be little to worry about. The thing to worry about is probably inflation, which, relative to income, is becoming more and more significant, so much so that raising real incomes is highlighted as a key challenge for Singapore.
The 3-Month SIBOR has dropped a notch from 0.44% to 0.31%, bringing it lower than SOR once again. SIBOR-pegged loans are now more attractive than SOR-pegged ones. This is also partly due to the absence of SOR-pegged loans currently being offered. Banks probably withdrew them after being spooked by the negative SOR back in August.
Interestingly, the 1-Month SIBOR maintains at 0.31%, matching the 3-Month rate, which makes for a rare yield curve profile (as seen above). On the other hand, the 6-Month SOR has been lower than the 3-Month SOR since August (currently 0.363% vs 0.402%), signifying an expectation that the 3-Month SOR may possibly fall some time down the road.
The trouble in Greece and Italy this week ignited a fresh flight-to-safety, resulting in the USD/SGD surging back to 1.29 after having fallen to 1.26 just recently. The crisis became the excuse for rate cuts and stimulus measures. However, despite the crisis, rate cuts and the rise in USD, oil price remained stubbornly high. I somehow doubt that the “confidence” in attaining a resolution of the Eurozone debt crisis is the reason behind the high oil price. Rather, as an analyst in the article puts it, oil price is in a “highly unstable equilibrium”. In other words, it is a supply and demand problem.
The last time SOR and SIBOR crossed path was way back in May 2009. That was when SOR fell below SIBOR and remained so for more than 2 years. The recent sharp increase in USD/SGD exchange rates (from 1.2 to 1.3 in 3 weeks) took SOR from -0.1 to 0.35 over the same period. It looks like MAS has kept the USD/SGD rate bounded at 1.3 for now, so SOR will likely stabilise, although it is to be noted that LIBOR has been on an increasing trend.
If we’re headed for a repeat of the kind of financial turmoil experienced in 2008 (and it looks like it’s cooking up a bigger storm this time), then we could be in for a rough ride. At least we’re in it together, like it or not
This just in, my other SIBOR pegged home loan has dropped by about 0.09%, corresponding to the fall in the 3-month SIBOR. This again results in some savings in my monthly instalment, not a lot , but any amount is welcome.
World’s End Close, Edinburgh
The events in the past week may be telling us that we could be one step closer to the end of the world. Ok, that’s a bit of an exaggeration, but these were significant events. US just lost its AAA rating for the first time. That means a loss of confidence in the US in their ability to repay their debt, and more so, a loss of confidence in the governance of the country. This has major repercussions on the financial system, especially the currency.
At the core of the currency system is trust. A currency note is only worth how much you believe it says it’s worth. If you believe a dollar note is only worth half its supposed value, and everyone thinks likewise, then it becomes so. It’s evident that the general perception of the value of the US Dollar has been on a downward trend. This spells trouble to a lot of people, especially to those holding a lot of US financial assets, since wealth held in such forms are now in greater danger of being wiped out, which happens on the day when they cannot be converted into any other forms of wealth.
The doomsday scenario that could happen is, the currency/monetary system breaks down. Everything you have in the form of cash turns into vapour. This may sound far fetched but it has literally happened before, in the Weimar Republic, where banknotes were burned for warmth.
In the near term, by logical deduction, what should happen is, as US treasuries loses its appeal, its value drops and the the yield goes up in tandem (the opposite is happening right now because there seems to be no safer alternative for parking money). There is no choice but to print more money to salvage the economy (i.e. QE3). Deflation could set in due to the slowing economy, but there is a likelihood of inflation as well, as the availability of physical resources diminish.
For SIBOR and SOR, the factors involved are the competing forces of the falling USD and rising interest rates. For now, the guidance on the Fed rates remains as to be kept at record low for “an extended period”. The current low treasuries yield is probably helping to keep SIBOR and SOR low as well. For the time being, it is looking good for SIBOR or SOR pegged mortgagees.
With the US bent on devaluating the USD and MAS allowing the SGD to appreciate, SOR was driven into its all-time-low territory again, coming in at 0.247% on 3 Nov 2010. Moreover, the Feds initiated a fresh round of measures to spur the US economy, keeping rates at 0-0.25% for an “extended period” and launching a new massive US$600 billion money printing exercise.
This probably means that SOR (and likewise SIBOR) is forced to stay low for some time. A few other trends were also triggered off – gold and commodities prices are up, which equates to inflation, and increased carry trade (notably into the AUD, since the Reserve Bank of Australia recently increased its benchmark cash rate by 0.25% to 4.75%).
A quick check on home loan rates : Best deals from 3m SOR + 0.9% (i.e. about 1.1+%) and 3m SIBOR + 0.65% (i.e. 1.09%) floating and 1.25% fixed. Reason to smile indeed.
News about home loan rates appear in the newspaper very sparingly, and this just happened last Saturday, showing up in the Straits Times with the headline “Cheaper home loans in store”. In a gist, the article says that “KEY interest rates that determine mortgage levels have fallen steeply, promising cheaper home loans but even leaner times for those with bank deposits. “¦ The falling rates have followed the trend of the rates set by the United States Federal Reserve, which continue to be at historic lows. They have also come as the Singdollar has been allowed to strengthen since April.”
Indeed, USD has fallen drastically against SGD recently, resulting in the Swap Offer Rate (SOR) falling to 0.29426 on Aug 11, 2010, the “lowest in at least 10 years”. This is good news to mortgagors, with savings to look forward to for perhaps an extended time.
To answer the question of whether SOR-pegged or SIBOR-pegged home loan is more attractive, they are actually more or less comparable. To quote actual examples, UOB offers SOR + 0.99 (which works out to 1.3%), while SCB offers SIBOR + 0.75 (which works out to 1.31%).
The article points to Bloomberg as the source of the Swap Offer Rate, which i have just come to realize provides updated rates shortly after the daily rate is determined at 11am, and even gives a chart with data from up to 5 years ago. This kind of makes my SOR daily chart redundant. I would recommend going directly to Bloomberg if you’re interested in getting the most authoritative rates, and to make use of the interactive charts they provide. I will continue to update my chart daily as far as possible, in fact now to use the rates published by Bloomberg (instead of the day-old rates previously). Hope you continue to find this site useful!
I have mentioned in my previous post that those of us who have taken up a SOR or SIBOR pegged loan may find ourselves at risk of having to pay a 1.5% penalty when doing a full redemption not on the rate repricing date.
When you sell your house, it is practically impossible to time the transaction such that you can do a full redemption exactly on the rate repricing date, and this being the case, you’re likely to have to pay a 1.5% penalty on your outstanding loan amount. Now that is a hefty and probably unfair penalty as it applies even though you are not bounded by any lock-in.
The way out of this is to, well, exit the SOR/SIBOR pegged loan by doing a conversion to a no lock-in floating rate package. You can do this provided you are not within any lock-in period. Now, a no lock-in floating rate package is what makes most sense since, firstly, you want to do the full redemption anytime soon, and secondly, floating rate packages have lower rates than fixed rate packages, and they’re likely not going to change within the short period that you’re planning to do the full redemption. So there you have it, your exit strategy.