Below Zero for Swap Offer Rate!!!

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Dennis Ng
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Below Zero for Swap Offer Rate!!!

Post by Dennis Ng »

Yesterday 10 Aug 2011 was a historic moment, for the first time in history, Singapore Swap Offer Rate falls below ZERO.

Singapore (Swap Offer Rate) SOR rate went down to -0.0119%, or below ZERO yesterday! Yes, it means that one can basically borrow money at almost zero interest rates for Housing Loans with interest rates pegged to SOR. eg. if Housing Loan is SOR + 0.8%, then you pay about 0.7881%. Considering that inflation rate in Singapore is currently at 5.2%, it means you pay NEGATIVE interest rate of -4.4119%, that you actually GAIN by borrowing money!

On the other hand, the Poor save money in Fixed Deposits and earn 0.7% interest. With inflation rate at 5.2%, he/she actually loses 4.5%, and is getting Poorer, NOT Richer.

This is why I always say in seminars that the Poor save money to become Poorer and Poorer while the Rich borrow money to become Richer.

Swap offer rate falls below zero
Increased cash flows into S'pore among reasons for historic plunge

Published on Aug 11, 2011

By Magdalen Ng

BORROWERS cheered yesterday as the swap offer rate (SOR), a benchmark interest rate that mortgage rates are commonly pegged to, fell below zero for the first time.

In a historic moment for Singapore's banking industry, the three-month SOR plunged to -0.0119 per cent.

The SOR, which is fixed by the Association of Banks in Singapore daily, represents the average cost of funds that banks in Singapore use for commercial lending. It also factors in exchange rate movements.

Traditionally, the SOR is more volatile than the Singapore interbank offered rate (Sibor), which is the other benchmark interest rate in Singapore.

A negative rate is startling because in economic theory, it implies that banks are so flush with cash that they now charge a 'fee' - as opposed to paying interest - for accepting deposits.

Bankers said yesterday that this is happening because investors are switching out of the US dollar, and there are increased cash flows into Singapore.

The Singdollar to US dollar exchange rate also affects the SOR. With a weakening greenback, the SOR will continue to fall.

Whatever the reason, Mr Alex Sng, who has a home-loan package for his condominium unit in Yio Chu Kang pegged to the SOR, is rejoicing.

The 26-year-old said: 'It's great. That means I'll be paying less, at least for a while.'

Banks here typically peg their loan packages to the Sibor or SOR, plus a profit margin.

But don't expect banks to end up paying their customers to borrow from them.

OCBC Bank and UOB, which have loans packages pegged to the SOR, have said that there are clauses to 'floor' the rates at zero, even if the SOR is negative.

Home owners taking up new Sibor-pegged property loans pay between 1 per cent and 1.33 per cent, while loans pegged to the SOR may end up paying between zero and 0.6 per cent with the new SOR rates, he noted.

Indeed, some economists believe that SOR rates are likely to remain low for a while yet.

UOB economist Chow Penn Nee said some factors that will keep interest rates low include the United States Federal Reserve's announcement that interest rates will be kept low until mid-2013.

Also, with the Monetary Authority of Singapore's current monetary policy stance of a Singdollar appreciation, the US dollar is likely to fall against the Singdollar.

This will mean even more funds flowing into Singapore, which still has a triple-A rating and is considered an alternative to the US dollar.

Mr Saktiandi Supaat, Maybank's head of forex research, said: 'We may see a rebound if there is some intervention by the MAS or if the forward rate changes due to market developments. But given the already low SOR rates we are seeing over the past year or so at around 0.2 per cent, the rebound may not be so soon.'

Barclays Capital economist Leong Wai Ho, on the other hand, does not think that the depressed SOR will persist.

He said: 'This is not considered equilibrium, and can't last too long. It counters the macroprudentials that have been put in place to lighten property speculation.

'I think this may be an MAS move to discourage fund flows to Singapore. It may last for two weeks, until we get over the phase of our lives that we are worried about the US downgrade.'

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
Dennis Ng
Site Admin
Posts: 9781
Joined: Tue Nov 29, 2005 7:16 am
Location: Singapore

Post by Dennis Ng »

From The Business Times

Negative swap rate signals S'pore rethink on S$ rise

SINGAPORE - Singapore is attracting an unwelcome flood of US dollars that has caused a key interest rate to turn negative, complicating efforts to dampen inflation and prompting speculation the central bank will tweak its policy to slow the rapid rise in the country's currency.

While Singapore prides itself on having a highly globalised and open economy, the stream of investors seeking refuge from international market turmoil in recent weeks could fuel price pressures on the tiny island, adding to fears of a potential property bubble, even as the economy shows signs of slowing.

That could persuade the city's central bank to reconsider its policy on allowing further appreciation in the local currency.

Authorities have allowed the Singapore dollar to gain 6.5 per cent against the US dollar so far this year, the most among Asian currencies, to curb imported inflation and as investors shy away from the United States and Europe where governments are struggling to resolve debt issues.

As global markets plunged last week, the Singapore dollar swap offer rate (SOR) fell below zero for the first time due to inflows into the Singapore dollar. The rate reflects lending costs as well as the expected forward exchange rate between the US dollar and Singapore currency.

The three-month SOR was fixed at minus 0.06 on Tuesday, widening from Monday's minus 0.01. It fell below zero on Aug 10.

Singapore's current policy stance is to allow a gradual appreciation of the local dollar against a basket of currencies to curb price pressures.

That stance, however, has attracted even more safe-haven inflows into the AAA-rated Southeast Asian city-state, threatening to magnify existing price pressures and hurting local banks by reducing their already low loan margins.

'A case could be made to argue for a slower pace of appreciation in light of the recent (downward) revision in the city-state's non-oil domestic exports,' said Maybank head of FX research Saktiandi Supaat.

Several traders speculate that the fall in SOR to negative levels, due in part to the Monetary Authority of Singapore's (MAS) failure to mop up excess liquidity, was an attempt by the central bank to discourage inflows.

Some said the fall in SOR could even be a signal that MAS might ease monetary policy to a slower or even zero percent Singapore dollar appreciation stance, since the strong inflows have had the adverse effect of fuelling inflationary pressures.

'We currently also have a parallel, but not identical, situation in the Swiss franc, where the Swiss National Bank, is attempting to engineer negative interest rates to discourage strength in the franc,' Oversea-Chinese Banking Corp said in a note to clients.

Asian countries such as South Korea have already taken steps to discourage hot money inflows while other AAA-rated nations such as Switzerland are trying to force down the value of their currencies, fearing big gains may threaten their export competitiveness even as global demand slows.

MAS reportedly intervened in currency markets earlier this week to prevent the US dollar from falling below S$1.20.

Lorraine Tan, director of research for Asian strategies at Standard & Poor's, said MAS will continue to maintain an appreciating currency bias as it was its main tool against inflation.

'But inflationary pressures have come down and there is less reason for MAS to let the Singapore dollar appreciate so much,' she added.

Reflecting global weakness, Singapore's economy is also slowing. Data on Tuesday showed non-oil domestic exports registering a surprise fall in July as electronics shipments contracted for a sixth consecutive month.

The weak trade figures raise the odds of the city-state sinking into a technical recession in the third quarter, after activity contracted in April-June, economists from Bank of America Merrill Lynch and CIMB said.

Citigroup economist Kit Wei Zheng said 'in the event that MAS decides to steer the NEER (nominal effective exchange rate) lower, the initial reaction would probably be a lower/negative SOR fixing in the first instance to deter inflows'.

'Once the NEER has depreciated and market expectations shift towards a neutral or weaker Singapore dollar, the SOR could then rise. This two-step process was also observed in July/August 2008' when Singapore let its currency fall, he added.

Bank margins
Singapore's three banking groups posted higher second quarter net profits as loans grew by 20-plus per cent and interest margins stabilised, but the fall in SOR to negative levels shows lending margins remain under pressure.

DBS, Oversea-Chinese Banking Corp and United Overseas Bank, along with foreign banks in the city-state, price some of their loans at a premium over SOR, which is fixed daily by the Association of Banks in Singapore.

Nomura analyst Anand Pathmakanthan said that while banks typically have provisions within their loan agreements to reset the reference rate to zero, 'this nonetheless still implies a 20 basis points-plus decline in total yield as compared to just two weeks ago.' The three-month SOR traded around plus 15 to 25 points during the month of July.

Singapore borrowing costs are already among the lowest in world, thanks to its high savings rate and safe image that helps it attract inflows from around the world.

Speaking to reporters last week, UOB Chief Financial Officer Lee Wai Fai said UOB had invoked 'market disruption clauses' in most of its loan agreements that will allow it to either reset the benchmark to zero for mortgages or use another reference in the case of corporate loans.

But he acknowledged Singapore's third-largest bank by assets had in the past priced some housing loans as low as SOR plus 75 basis points, which meant some lenders may soon be paying as 0.75 per cent per annum on their mortgages - well below inflation which is running at 5-plus per cent.

'Until safe haven flows subside or we see broad US dollar strength, SOR fixings will probably staying low or negative in the near term,' said Citi's Mr Kit. -- REUTERS

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
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