Jump in Sibor and Swap Offer Rate

[reporter2]

http://www.straitstimes.com/business...wap-offer-rate

Jump in Sibor and Swap Offer Rate

Aug 26, 2015

Grace Leong


Two key interest rates affecting business loans and mortgages in Singapore have shot up.

A weaker Singapore dollar in the wake of the devaluation of China's yuan coupled with the looming US interest rate lift-off are the main factors driving the increase.

The three-month Singapore interbank offered rate (Sibor), used to set mortgage rates, spiked to 1.00208 per cent yesterday from 0.99600 per cent on Monday. It has more than doubled since January but is still way below its peak of 3.56214 per cent in July 2006.

Its highest level so far this year is 1.02705 per cent, reached on April 9.

The three-month Swap Offer Rate (SOR) - typically used to price corporate loans - spiked to a new year's high of 1.40236 per cent yesterday from 1.33242 per cent on Monday. But that is still below its peak of 3.77193 per cent on June 30, 2006.

"The weakening Singapore dollar, a corollary of both the regional currencies nose-diving and continued market speculation of further Monetary Authority of Singapore policy easing, translates into upward pressure on SOR. Sibor tends to follow with a lag. There is likely some pricing in of the anticipated Federal Open Market Committee rate hike too," Ms Selena Ling, head of treasury research & strategy at OCBC Bank, said.

But this could add to the drag on the already sluggish Singapore economy, she warned, as rising rates will potentially affect pricing for both corporate and mortgage loans. A softer Singapore dollar can put upward pressure on local interest rates such as SOR as investors seek higher yields as compensation for holding the weakening currency.

The Singdollar recovered slightly to 1.3969 yesterday from a five-year low of 1.4130 against the US dollar on Monday.

Mizuho senior economist Vishnu Varathan sees SOR testing the 1.5 to 1.6 per cent range in the near term as volatility in currency markets is expected to increase, and Sibor rising to between 1 and 1.2 per cent in the next three months.

"Expectations of the Singdollar's depreciation have been ratcheted up very much higher and faster because of the global rout, and investors expect the sell-off in emerging currencies to continue," he said.

"They also see the MAS allowing the Singdollar to ease more if the risks of fresh deflationary shock from the slump in oil prices are significant enough, and if global financial market shocks affect the Singapore economy. Businesses and home owners are going to be sore because rates are likely to go up much higher and faster."

[reporter2]

http://www.businesstimes.com.sg/bank...since-jan-2009

Three-month SOR jumps to 1.4%, highest level since Jan 2009

SOR has risen sharply since the yuan devaluation on Aug 11; economists say SOR is reacting to Asian FX weakness

By Siow Li Sen

[email protected]@SiowLiSenBT

Aug 27, 2015


THE three-month swap offer rate (SOR) has jumped again. It was quoted at 1.40236 per cent on Tuesday, a level last seen in January 2009.

Used typically to price commercial loans, the three-month SOR has risen sharply since China stunned the market with its yuan devaluation on Aug 11. The three-month SOR stood at 1.07461 per cent on Aug 11.

Another key local interest rate, the three-month Sibor or Singapore interbank offer rate, typically used to price home loans, was unchanged at 1.00208 per cent on Wednesday.

"Most of the SOR moves are FX (foreign exchange) related," said Eugene Leow, DBS Bank economist.

"Increasingly, the market is coming to terms that the RMB (yuan) will be on a weakening trajectory. As the RMB weakens, the market is speculating that there would be further Asia FX (including the Singapore dollar) declines versus the dollar," he said.

"This development is putting upward pressure on Singapore dollar rates."

The Singapore dollar on Wednesday was quoted at S$1.4012 to the greenback. It was at S$1.3881 on Aug 10.

Selena Ling, OCBC Bank economist, said the sharp jump in SOR rate is due to a bit of panic. "I think there's a fair bit of panic and over-reaction in the risk assets at this juncture," she said.

The SOR is reacting to the Asian FX weakness, specifically the Singapore dollar and the attendant speculation of a further Monetary Authority of Singapore (MAS) policy easing, post-yuan devaluation regime change, and some anticipation that if crude oil prices take another leg down this could pave the way for most central banks to pull off their hat-trick as happened in January, said Ms Ling.

Back in January this year, several central banks including the MAS weakened their currencies due to the significant change in inflation outlook following weak oil prices. Oil prices had fallen to US$47 a barrel in January from US$84 a barrel in October 2014.

Brent lost 10 US cents to US$43.11 a barrel on Wednesday as of 0110 GMT after it settled up 52 US cents at US$43.21 a barrel in the previous session, reported Reuters.

"SORs have been caught up in a negative feedback loop between emerging market weakness and fear of outflows," said Victor Yong, United Overseas Bank rates strategist.

In such an environment, sentiments on Singapore dollar invariably get caught up with regional woes, said Mr Yong.

"Downgraded currency expectations have since resulted in higher SORs, with overshooting by forced US dollar hedging further exacerbating the moves," he said.

A Bloomberg report on Tuesday said some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the US dollar by the end of the year, citing people familiar with the matter.

The research further factors in the yuan falling to 8 to the US dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven't been made public, said the report.

A US dollar-yuan rate of 7 would be a more than 8 per cent depreciation from Tuesday's level. At an Aug 13 briefing on the yuan, People's Bank of China deputy governor Yi Gang dismissed the idea that China would devalue the yuan by 10 per cent to boost exports, calling it "nonsense".

[Kevin Tan]

http://www.theedgeproperty.com/sg/co...interest-rates

To go into the topic of where mortgage interest rates in Singapore are headed, it is important to review the root cause. Analyst and economist have lamented for years that printing money (also known as Quantitative easing QE) leads to low interest rate and that in turn leads to high inflation. They have been wrong for seven years in a row. Many newspapers that give headlines after headlines of sensational news of low interest rates leads to inflation have fallen flat for seven years in a row.

If you look at the chart of US Inflation rate versus US Fed funds rate, you will see that low interest rates since 2008 till now in 2015 have not led to inflation. In fact, inflation has dropped to almost zero. Therefore low interest rates do not necessarily lead to inflation, it depends on context.

In the case of Singapore, apart from the recent spike in January 2015, the low interest rates persisted since 2009 and inflation spiked at about 3.5% and then drop to almost 0 recently. And instead of rising inflation rate, inflation was in fact falling.

For a country with a large domestic economy, one of the key leading indicators for inflation is unemployment rate and disposable income growth. A low unemployment rate usually leads to strong income growth and hence inflation. Hence it is income growth that eventually leads to inflation.

The US unemployment rate is now 5.3% (Part of US full employment figures could potentially be skewed by election spending in the USA).

The past economic booms corresponds to unemployment rates of around 4 to 4.5%. Hence the US is approaching “full employment”. However income growth has been soft, coupled by softer crude oil prices, inflation remains soft.

The US Fed adopts a policy stance of Maximum employment and medium range inflation target of 2%.

Weak global growth is evident when China further reduced its interest rates to 4.85% to stimulate growth. So the real issue is really one of deflation or low inflation, not inflation.

Why are we talking about other countries when we talk about Singapore mortgage interest rate trends?

The Singapore Sibor overnight rate closely corresponds to the US Fed funds rate. An increase in the Fed overnight funds rate will likely be follow suit by Singapore.

The Fed’s unemployment figures for 2015 is achieved. Their view is balanced between generating further employment and maintaining inflation.



Chart 1



Source: Trading economics



Chart 2



Source: Trading economics, iCompareloan.com



Exchange Rates Movement

Singapore is a small economy with a large external trade, so it makes sense to control exchange rates against its major trading partners to moderate imported inflation.

SGD is weakening against the USD
SGD is strengthening against the EURO
SGD is strengthening against the YEN
Volatile exchange rates often leads to loss of confidence and leads to exodus of funds.

If you are a hedge fund manager holding a currency that is expected to weaken 5% in a year, while only earning 1% deposit interest rate, would you be tempted to switch out of this currency? Would you be less likely to move your money if interest rates are higher?

The Fed is likely to raise interest rates in 2H2015. Therefore smart money has already moved into the USD in anticipation of both the US economic recovery as well as the better yield (deposit rates). In order to prevent exodus of funds to the US market, Singapore’s regulators may have to act pre-emptively themselves or via proxy to raise interest rates. (they have been not known to intervene in rates, though)



Chart 3



Source: Trading Economics, iCompareLoan.com



Chart 4



Source: ieconomics, iCompareLoan.com



Deposit Rates already higher than Sibor

Several banks are offering fixed deposit rates (24 months) at 1.8 to 1.95% and 10 month fixed deposits at around 1.5% while Sibor (12 month) is only about 1.06%.

There is a discrepancy in rates between Sibor (12 month) and Fixed Deposit rates. Even though these are promotional deposit rates, what this means is that the banks see interest rates rising and are starting to lock in deposits in anticipation of rising interest rates.



Chart 5



Source: iCompareLoan.com



Singapore Savings Bond – Singapore Heavily in Debt

The Singapore Savings Bond is schedule for release in 2H, 2015. The initial tranches are for 1 to 2 billion dollars. The offered interest rate is about 2.5% (if held to maturity of 10 years). The amount being raised is still insignificant relative to the overall deposits. Nonetheless it is worrying that Singapore is borrowing so much despite being one of the world’s most indebted nations at Debt to GDP ratio of 382%. A large part of these debt is owed via the CPF. Savings Bond is unlikely to affect Singapore’s interest rates in the short term due to the small tranche. This is nonetheless a worrying trend in the longer term when the tranches gets bigger, sucking up more funds and impacts interest rates.



Summary

There is a benign inflation and moderate growth in Singapore coupled with near “full employment” in the USA at 5.3% while inflation is close to 0% (due in part to low crude oil prices). Global weak growth and a deflationary environment leads many countries such as China to reduce interest rates. The Fed’s policy stance is for “Maximum employment” and 2% inflation target rate, hence it can wait a while before raising rates as long as inflation stays low. At a rate of ~0.1% drop in unemployment a month, by November it should fall below 5% at current trajectory and the Fed may be tempted to raise Fed Funds target rate by 0.25% to 0.5% as a precautionary measure.

Singapore’s interest rates should also start to rise considering the weakening Singapore dollar and correlation to the US Fed Funds rate. Singapore’s deposit rates being higher than Sibor also point to an increasing interest rate environment.

While many factors are at play, we foresee a moderate increase of 0.20% (lower range) to 0.75% (top range) in Sibor rates. One-month Sibor is now at 0.76%, and we estimate that it could end up at between 0.95% and 1.5% at year-end.



This article appeared in The Edge Property Pullout of Issue 689 (August 10) of The Edge Singapore.

Paul Ho is founder of www.iCompareLoan.com. The views expressed here are his own.