Random Thoughts : DIY Hedging Your Home Loan And The FOMC Minutes

Poor economic growth numbers, lower inflation and higher rates.

26 Dec 14 Nov Industrial Production -1.4% MoM vs expected +0.4%
26 Dec 14 Nov Industrial Production -2.8% YoY vs expected +0.3%
2 Jan 15 4Q14 GDP +1.6% QoQ vs expected +3%
2 Jan 15 4Q14 GDP +1.5% YoY vs expected +1.8%
5 Jan 15 Dec PMI 49.6 vs expected 51.0
5 Jan 15 Dec Electronic Sector Index 50.5 vs expected 50.1

Equity markets are pretty much hostage to global sentiments, oil prices and the USD.

Market now in panic over the 4 year highs in the 1 and 2 year interest rates, 5 year highs in our funding rates, SIBOR and SOR and a 4 year high in the USDSGD.

Pump prices are lower but is hardly giving any cheer especially when mortgage rates are climbing because that is the beauty of the SGD fx policy.

Link to what I wrote last year – https://tradehaven.net/market/why-higher-inflation-is-good-for-singaporeans/

sgd cpi neer

Looking at the chart above comparing the USDSGD, SGD Neer with the CPI, it would appear that the USDSGD move is justified.

We smelt a rat late last year when UOB abruptly withdrew their fixed rate loan offerings as SIBOR started to inch up, leaving folks unable to lock in long term rates, something private wealth clients do not really have a problem with.

Link to what I wrote last year – https://tradehaven.net/market/why-credit-traders-like-fixed-rate-mortgages/


And we know that the man on the street did not really have a chance once the government started clamping down on the regulations starting in 2013.

There are ways to get around things as exemplified by CDL recently in their Sentosa Cove transaction with Blackrock. Others just plunk the properties into special purpose entities and the rest just transact out of offshore vehicles.

Yet those avenues are beyond the means of ordinary people and the gloomy faces over the new year.

How would one hedge that 3M SIBOR then ?

It is such a sticky instrument if you look at the chart over the past 5 years, plateauing before collapsing to a lower plateau.

3m siborChart of 3M Sibor 2010-2015

I would suggest fixing by fixing, i.e. every 3 months.

What options do we have ?

Not alot. There are no SIBOR or interest rate futures and interest rate swaps are quoted OTC, the same for swaptions and other options. There are no bond futures and such.

That only leaves us 2 liquid instruments in fx and fx options.

If we assume that CPI is falling and that economic growth will be lacklustre and we have the market currently expecting the MAS to ease the SGD strength in April this year, we have a case to worry about higher short end rates.

This means that buying USDSGD is a good idea, because there is every sign that SIBOR is pre empting the USDSGD move and it is really too much hassle to hedge against the NEER basket especially when the USD is the bulk of it.

The alternative would be to take advantage of the high vols to sell some USDSGD put options that will earn you a premium as well as give you the opportunity to buy at a lower level than current spot.

Good enough ?

Now to the FOMC minutes coming up early Thursday morning at 3 am SG time.

I like Citibank’s observation of the situation – that too many people got it right this time !

Yes, it is true. Everyone is on the same side in the USD and long equity trade into the new year which has led to the USD correction today, with Gold, Silver, JPY, Turkish Lira, NZD and AUD the main beneficiaries.

No one really knows what has been priced into this minutes, really. But most were happy to assume the hike cycle to begin in earnest sometime mid 2015 and now we have silence as uncertainty creeps in.

It is a case of cup half empty or cup half full, see it as you please and I do not think the market is willing to give up on that equity trade yet as oil prices continue to freefall (WTI breaking under $50 today and 10Y US Tnote trades under 2%, an 18 month low).

Comparing the Brent Oil curve today against what it was a year ago, the contango of current prices suggest that speculative shorts may be looking to take some profit before the minutes and Friday’s non farm payrolls.

brent forward curve

We could do well to buy some oil stocks for that short term punt.

As for the USDSGD, wait for the FOMC minutes for that buying dip ?