SOR – Yen Kai's Idea Cast

In choppy waters

The recent weeks have been some of the most volatile ones as the fear of the European financial crisis ripples through the economies of the world, resulting in a massive flight to safety to the USD and funds being drawn out of troubled countries, pushing up the USD and triggering bank runs. The rise in the USD depressed commodity prices, including that of gold, though as at the time of writing this, gold just shot up about US$50 (3%) on news of US jobs data being weaker than expected, thus sparking speculation of possible monetary easing to come. So it seems gold is seen as a safe haven again relative to the USD.

With oil prices down significantly (reads low inflation) and unfavourable jobs data, whom the Feds chief mentioned as a criteria for introducing more accommodation, it does seem like we are getting set for QE3. Things has to look good in an election year.

One can imagine that the magnitude of funds movement happening currently must be quite sizable, given that the rise in the USD/SGD rate was fast and furious, going from 1.24 to almost 1.3 within a month, despite MAS’s plan to allow SGD to appreciate. This is of course due to the fact that most, if not all currencies have fallen against the USD, so SGD moves in tandem. Interestingly, SOR has fallen in the past week (from 0.419 to 0.307) despite the steep increase in USD/SGD. Going by how SOR is supposed to be derived, this should mean that USD borrowing rates have come down.

S$ to appreciate

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?

Libor rigged

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 falls below 0.4%

The fall in USD/SGD exchange rates over the last few days (from 1.3 to 1.256), coupled with the Fed’s commitment that they will hold rates low through to at least late 2014 resulted in a significant fall in the SOR. As an analyst in the article points out, “What they’re doing is setting the table for some sort of additional monetary easing”. As one would expect, precious metals and commodity prices reacted rather positively.

SOR soars above 0.5%

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.

Rate cuts on the horizon

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.

Return to normalcy

Oil hit aboove US$94 per barrel today. For some time, it hovered around US$88 and refused to go down. USD/CAD went below parity (didn’t hold though) for the first time since Sep 21. SOR rose from under 0.2% to almost 0.35% in a little over a week, even as USD/SGD fell from 1.3 to 1.26 in just over 2 weeks. As mentioned in a previous posting, SOR and SIBOR were expected to be going up. SOR is probably tracking the climb in LIBOR, which increased quite significantly in the past 3 months. Treasury yields have been on an uptrend as well.

These look to me like the unfolding of the flight to safety in July, which is in a sense, a return to normalcy. As at now, the price of gold is also picking up. I would personally look at the price of oil as a good indicator of reality, since it is consumed by everyone in the world, though it is also subject to some measure of speculation. Based on known facts such as the increasing world population and stagnating oil production, i would guess that the “normal trajectory” of the price of oil should be upward (assuming that whatever tricks they throw at the monetary system cancels out eventually), which we’re seeing in the current price movement. As usual, these are just my personal opinion, coming from someone without credential, so, with a pinch of salt, please.

SOR surpassed SIBOR for first time in more than 2 years

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 Winking smile

Just in time

Seems like i caught the dip in SOR just in time, and the negative SOR rate is actually worked into the overall rate! It should have been SOR + 0.99% and SOR happens to be -0.01% on that day. I guess banks actually do make a profit from taking up a SOR loan themselves and they’re obligated to pass it on to consumers under the terms of the loan contract.

Holy Cow! SOR hits negative territory!

The Daily SOR chart looks rather different today. SOR rates are sub-zero! Initially i thought it was due to some error, but realized later that the negative figures are for real. This is probably mostly due to the plunging treasury yields, plus the Fed’s decision to keep record low rates till mid 2013 and low USD/SGD rates. As the market is very volatile at the moment, this may be just a short term occurrence.

If SOR stays below zero, i wonder what it translates to for SOR pegged loan mortgagees. Might have to pay for just the bank margin portion of the loan interest (hurrah?!).

Update: found out that as stipulated in the loan contract, the interest rate is and always is SOR + bank margin, even if SOR is negative, so you end up paying less than the bank margin!

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