Singaporeans, Are Your Loans Feeling Heavier ?
If you notice that your monthly instalments are getting a little higher, you are spot on the fact that 1 month SIBOR is at its highest levels in 4 years.
Ok, we cannot say the same for the 3 month SIBOR or the 6 month SIBOR yet but they are at their 3 year highs.
For Singaporeans, I do not think there are more than a handful or maybe hundred, including past and present money market dealers who understand how SIBOR works or what SIBOR is. (refer to my excerpt below)
And I feel awkward going around correcting misconceptions about SIBOR so I have just given up because when I was at TIMES the other day, I picked up this $30 book with one of those multiply-your-money titles, written by a Singaporean expert, that claims that SIBOR is related to LIBOR due to our exchange rate policy. And I do not profess to be an expert as neither have I written any $30 books.
Ho ho ho. Look how LIBOR did for the same period.
So why is 1M LIBOR still at 0.154% when 1M SIBOR is at 0.37105% ?
“The reality of the current environment is that long term(>1 month) borrowing and lending does not take place very much. Some attribute it to the reduction of placement limits after the Lehman crisis.
Which makes deposits even more important to banks yet I see bank accounts frozen at their 0.05%. Which begs the question of HOW IS SIBOR DERIVED in the absence of a wholesale market ?” https://tradehaven.net/market/sibor-bullies/
I will make some observations.
1. Local banks hold the key to SGD deposits (savings accounts at 0.05% etc.) and from deposits, you get lending.
* From another recent article, “It would seem that UOB is running more SGD loans and DBS is doing the opposite and UOB would be short of SGD funds because 85% should be the breakeven level.” https://tradehaven.net/market/safest-banks-and-strongest-banks-what-happened-to-stanchart-can-happen-anywhere/
2. Local banks have all posted very, very decent loan margins that have improved over the past quarter.
Results are unavailable for foreign banks.
3. Other banks who have no or lesser access to SGD deposits have to fund themselves via USD swapped into SGD ie. SGD forwards.
SGD that has to be procured from the local banks in the local money markets.
4. “I have my misgivings which are probably unfounded and am not seeking to challenge the integrity of the SIBOR system. It is just worthwhile to point out a minor flaw here.
SIBOR is required to price loans. Banks do not actively trade it. SIBID is conveniently forgotten since it does not determine deposit rates anymore. This creates an opportunity for banks to keep SIBOR high without having to justify deposit rates to the little people like my 11 y.o. son, who happens to have some savings whittling away against inflation (5%) at 0.05% per annum.” https://tradehaven.net/market/sibor-bullies/
* Incidentally, son is 13 now.
So let’s go with Pt.3. That SGD forwards could have an impact on the SIBOR.
This is what the 1M SOR chart looks like.
Aha, yes. We see the recent spike in SOR which justifies the move in SIBOR. We are not quite at 4 year highs though.
But cast your eyes back to Sep 2013 for the SIBOR curves.
What caused that spike up ?
USDSGD ?
So we had USDSGD higher, SOR unchanged and SIBOR higher ?
And frankly, no one will tell you why because it is top secret !
Because the day the retail market turned to SIBOR loans when SOR turned negative back in 2011, I think no one had any idea that they have just crossed over into a twilight zone.
Now, I suppose people will want to know how to hedge it ?
Related Articles :
Why Credit Traders Like Fixed Rate Mortgages https://tradehaven.net/market/why-credit-traders-like-fixed-rate-mortgages/
To Hedge That Housing Loan https://tradehaven.net/market/to-hedge-that-housing-loan/
Excerpt on SIBOR :
“What on earth is SIBOR ?
There is no way of deriving that number from any monetary policy. It does not trade in the market much because interbank activity for SGD SIBOR has been drastically reduced as banks have all but stopped much of the outright lending and borrowing business since Lehman days. Much funding is done via fx forwards, swapping SGD for USD or vice versa, ie. via SOR, which diminishes the role of SGD SIBOR.
I am not about to begin a history lesson on SOR except that many moons ago, money market trainees were taught that SOR = Sibor plus cost of funds*. There is none of that notion now and more than half the market is ignorant of that concept. No one knows the origin or purpose of SOR these days except that it is the forwards derived rate.
*Cost of funds has also much to do with the liquid reserves that MAS requires banks to keep for regulatory purposes.
SIBOR should theoretically be lower than SOR then. Yet because of its limited use and the elimination of the use of SIBID completely, SIBOR has been consistently higher than SOR. That is perhaps because SIBOR’s only use these days is for loan fixings ?”
Very good write-up TH. It is something that some 1st-class honours financial grads can’t explain clear too.
Let me chip in my 1.5cents. In non-uni grad context, three things will likely happen when SOR is higher than SIBOR in the future ahead:
1. Global rates are likely to be significantly higher, than where we are today.
2. USD will likely to be significantly stronger, than where we are today (against SGD)
3. Mathematically, the economy is likely to enter contractionary mode (tighter liquidity, weakness in leveraged assets, etc)……………certainly tighter, may or may not translate to outright recession.
Yes. USDSGD is the key.
But balanced with lower inflation. http://52.77.202.71/market/why-higher-inflation-is-good-for-singaporeans/
Thank you for this article!
I know for a fact that various banks contribute rates to get an average for the SIBOR. Its not very objective nor transparent.
http://www.abs.org.sg/rates_sibor.php
At least SOR is more transparent and objective due to the USD spot rate used to derive SOR.
After reading your article, i have more comfort on my own analysis to use SOR for my mortgage.
There is only 1 issue that I forsee. In the sg fx policy, managing sgd against a basket of currencies…at the moment when usd is used as the settlement currency for trading, there is active monitoring and management by MAS. However, nowadays due to the exertion of US prowess on sanctions, the next big currency pair to come up might be EUR , CNY. Not sure by then what would happen.
Hi PF,
“contribute” is a good word. Contribute is what happened in Libor too.
When all the banks have only 1 use for SIBOR ie. to price loans and there are very few trades in it, we have a small problem there.
Incidentally, over 100 traders were rounded up for fixing misdemeanours in Singapore a few years ago and that included SOR. Most of them were re-employed subsequently, and some to big roles as well.
USD will continue to be the main settlement currency with 70% of global trade transacted in it. Hard to see that changing without upsetting many systems in place.
3M-SOR increased from 0.28% to 0.51% (yesterday) since this article was published.
3m SOR 4 year high 0.56185% 15 Dec 2011.
Today 0.46616%.
Low -0.6987% 11 Aug 2011.
The highest fix for 3m Sibor in the past 4 years is 0.44752% yesterday.
Once again, we observe that 3M SOR is ready to trend above 3M SIBOR.
Came off with USDSGD.
Hearing potential intervention earlier this week.
3M SOR continues uptrend and crosses 0.7% this week
It is temporary, from experience. These spikes are nicely engineered windows of opportunities for local banks to do some lending.