Financial Vulnerabilities In Stability Part 1 – Leverage Will Get Expensive

103 pages this year, compared to last year’s 91 pages. The Financial Stability Review is out again and I have not read it all yet. Link to report – http://www.mas.gov.sg/~/media/resource/publications/fsr/FSR%202014.pdf

Link to my thoughts last year – https://tradehaven.net/market/down-playing-the-sgd-for-the-right-reasons-sgd-corporate-bonds-and-usdsgd/

And it is another stern note as usual with the opening theme being Global Financial Vulnerabilities Remain Amid Policy Uncertainties

It was pointed out to me today that the 1 year SOR has spiked up 0.125% to 0.475% from 0.35% just 2 months ago. That is a something that does not happen often in the world that we live in and the US 1 year rate is still at 0.34% today and rate manipulation is a thing of the past.

1Y IRS

Well, it is definitely because of this chart, the 6M SOR fixing.

6M SOR

And Libor is not moving.

6m libor

This means that MAS is right at last !

Dec. 3 (Bloomberg) — Singapore’s central bank warned that rising global interest rates could weigh on household and corporate debt and pose risks for banks in the city-state.

That was said in Dec last year.

A fortnight ago, we noted that the 1 month SIBOR is at its highest levels in 4 years and that is still holding at 0.378% today. https://tradehaven.net/market/are-your-loans-feeling-heavier/

I asked around and everyone had their own theory.

1. The new MAS LCR – Liquidity Coverage Ratio that will hit bank’s balance sheets in 2015 and banks would pass on the additional costs to clients.
2. USDSGD at a 23 month high which adds pressure to the fx forward points that are used to derive SOR. 3. Carry trade unwinds where investors borrow in a country with
low interest rates and park funds in higher-yielding markets.

It is probably a combination of everything as inflation has fallen to a 5 year low which leaves some room for the SGD to weaken.

The worrying bit for me is not any of the above.

It is that MAS is actually comfortable about this happening and are not about to embark on any BoJ and ECB stunt to pump more liquidity into the system to help us buy those bonds on leverage anymore !

And as long as the SGD does not prove to be a profitable trade, we can only expect liquidity to tighten into year end.