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Rise in Sibor leads to bigger loan repayments but higher interest for cash deposits for some

The global credit crunch has started hitting home here with short-term interest spiking, spelling bad news for some home buyers but better news for those with cash in bank deposits.

Local banks are said to have tightened their credit to each other and to corporate clients, which has had the effect of making money harder to borrow.

The three-month Singapore Interbank Offered Rate (Sibor) has jumped in response, up by 100 basis points in just a month to 2 per cent.

Sibor is the rate at which banks lend cash to each other and so directly influences what consumers pay on loans like mortgages as many home loans are pegged to it.

Take a home buyer with a 20-year mortgage of $100,000 pegged to the three-month Sibor plus 1 per cent.

Sibor’s sharp rise could mean a monthly instalment of $506 surging to $555, according to United Overseas Bank’s (UOB) head of loans, Mr Kevin Lam.

The one-year Sibor rate has also been rising, though not as fast as its shorter variant. It moved from 1.75 per cent last month to about 1.875 per cent now.

‘The majority of our customers have chosen the 12-month Sibor, where the rates are fixed for 12 months. Their monthly instalments will not be affected since the rates will only be refreshed every 12 months,’ said a DBS spokesman.

Economists said short-term rates are elevated and rising, including those here, reflecting the ‘dislocations’ in global credit markets, as well as ’stresses amid the global shortage of US dollars’.

‘With everyone still wondering and suspecting who is next, credit and interbank markets are freezing up,’ said OCBC Bank economist Selena Ling.

While key central banks around the world have been injecting massive amounts of liquidity to break the impasse in the interbank markets, economists say this may not be enough.

Ms Ling said: ‘While these massive liquidity injections have ensured that funding for overnight to one week is still available, albeit at somewhat elevated rates, term funding exceeding one month is still hard to come by.’

Higher interbank rates could also translate into higher lending rates for companies, and analysts say this could add to ‘downside growth risks’ for countries like Singapore already hurt by export slowdowns.

Long-term Sibor rates have not risen as quickly as short-term ones, perhaps because funding pressures are more immediate in the short term, said Citigroup economist Kit Wei Zheng.

On the flip side, the rising Sibor has meant higher deposit rates for some savers.

HSBC’s rates for its multi-currency account, which are pegged to one-month interbank rates, has moved from 0.17 per cent a year as at Aug 29, to 1.17 per cent as at Sept 29 for amounts less than $25,000.

This gives a yield better than most saving deposit rates of 0.25 per cent, though HSBC’s rates for its multi-currency account could head south if short-term interbank rates fall.

Mr Dennis Khoo, general manager of lending at Standard Chartered Bank, said there will be ‘upside pressure’ on Singapore dollar Sibor in the immediate future.

But Mr Khoo expects the three-month Sibor to decline early next year to just below 1 per cent and remain around that depressed level for most of next year.

‘We believe a US government-led rescue plan for the banking sector should be finalised and announced soon,’ he said.

Since short-term interbank rates are expected to fall, consumers could consider a mortgage pegged to the three-month Sibor rather than one linked to the one-year Sibor, suggested Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

Mr Leong described the current situation - where short-term rates are higher than long-term rates - as an anomaly. It is the credit crunch, he said.

As a result, he would pick a shorter-term Sibor-linked package despite the higher instalments over a longer-term one as the three-month Sibor would trend lower.

The same reasoning applies to fixed deposits. ‘If I’m putting money into a fixed deposit, I’ll put it in a two-year fixed as I’m afraid short-term rates will go down,’ he said.

Banks say that although the three-month Sibor has moved up significantly in the past week, Sibor-pegged home loans remain popular.

‘They continue to be favoured over fixed rates and variable rates schemes as the applicable gross rate (Sibor plus a mark-up) is still relatively lower than the other two rate types,’ said Mr Gregory Chan, OCBC’s head of secured lending.

Source : Straits Times - 30 Sept 2008

A SPIKE in the three-month Singapore interbank offered rate (Sibor) may spell higher housing loan rates for some, but mortgage experts say there is no cause for worry given the low base enjoyed by home owners for the past few months.

The benchmark Sibor, the rate at which banks lend to each other, for three months fell as low as 1 per cent in August. Amid recent financial turbulence, it soared from 1.76 per cent last week to 2.23 per cent before hovering at around 2 per cent yesterday.

Mr Dennis Ng, spokesman for mortgage consultancy www.HousingLoanSg.com, said 2 per cent is still considered low, given that the Sibor was around 3.5 per cent about 18 months ago, at which time home loan rates averaged around 4 to 5 per cent.

Banks that Today spoke to acknowledged the latest upswing in the three-month Sibor will affect those with home loan packages pegged to the interbank rate.

Mr Dennis Khoo, Standard Chartered Bank’s Singapore general manager of lending, expects upside pressure on Sibor “in theimmediate future”, causing the interest rates on Sibor-linkedhousing loans to moveupwards as well.

“The current fluctuations in the short term rates willaffect customers who have chosen packages pegged to the three and six-month Sibor,” said a spokesperson fromDBS Bank.

According to Mr Bryan Ong from bcp.com.sg, homeowners can expect to pay about $80 - $300 more per month for an outstanding mortgage of $500,000, should the Sibor rise from 1.3 per cent, the average rate from February to early September, to 2 per cent.

Mr Ong, who provides mortgage consultancy for private properties via the website, also advised customers worried about the current spike to go for a 12-month Sibor fixed rate that is less volatile.

But such loan packages typically charge a higher rate as a trade-off for more certainty, noted Ms Annie Lim, managing director of Global Creatif Financial. “The majority of our customers have chosen the 12-month Sibor - where the rates are fixed for 12 months - and their monthly instalments will not be affected since the rates will only be refreshed every 12 months,” added DBS.

Mr Ng also added that loans pegged to banks’ internal board rates will also be influenced by Sibor - though it is harder to gauge the increase, as these board rates are less transparent.

Still, most experts expect the Sibor spike to be temporary, with Standard Chartered’s Mr Khoo predicting a dip below 1 per cent in early 2009 and remaining around that level for the year.

Source : Today - 30 Sept 2008

Short-term interest rates here jumped again yesterday, sending it higher than the US Fed Fund rate of 2 per cent and causing the Monetary Authority of Singapore to inject money into the system.

Underlining the seriousness of the situation, the MAS in a rare statement confirmed that it had intervened in the interbank market.

‘A combination of a dislocation in global money markets and quarter-end funding pressures caused Singapore dollar interest rates to firm this morning. To ease market funding pressures, MAS kept a higher level of liquidity in the banking system through its market operations,’ it said last night.

The 3-month Sibor or Singapore interbank offer rate was fixed by the Association of Banks at 2.23 per cent yesterday, up from 1.76 per cent on Thursday.

‘Rates have since eased to about 2 per cent,’ the MAS said.

MAS said that it was prepared to inject additional liquidity, if required. The 3-month Sibor is now almost double of what it was a month ago.

This could hit home loan borrowers who have been enjoying low interest rates, especially those on interbank pegged rates.

A month ago, on August 26, the 3-month Sibor was 1.18750, up slightly from a low of one per cent on August 7.

‘Banks are tightening credit to each other and to their customers,’ said Matthew Wilson, Morgan Stanley analyst.

Capital is scarce globally and banks are responding by rationing or preserving capital, he said. ‘Refinancing may become more difficult and we risk entering a vicious credit/capital cycle as de-leveraging takes hold,’ said Mr Wilson.

‘Unless risk aversion subsides and/or the Fed cuts the Feds rates, upward pressures on domestic interest rates could persist for awhile,’ said Kit Wei Zheng, Citigroup economist. Despite coordinated action by global central banks to inject liquidity, USD interest rates could stay high near term, pulling up SGD interest rates as well, said Mr Kit.

Ho Woei Chen, United Overseas Bank economist noted that with the exception of the Asian financial crisis, the 3-month Sibor has always been trading at a discount to the Fed funds target rate which is currently at 2.00 per cent. ‘We expect the current phenomenon to be temporary,’ she said.

The spike in wholesale interest rates will hurt home loan borrowers who peg their loans to Sibor. ‘Volatility in interest rates causes mortgage instalments to vary with each re-pricing period,’ said Kevin Lam, UOB head of loans.

‘This could affect customers’ personal cashflow management. For example, if the Sibor rate increases by one per cent, a customer with a $500,000 loan (on 20 years loan tenure) will see his annual instalment increase by $2.928,’ said Mr Lam.

Source : Business Times - 27 Sept 2008

The turbulence in global financial markets hit home yesterday when the three-month Singapore Interbank Offered Rate (Sibor) shot up to 2.23 per cent from 1.76 per cent on Thursday.

The Sibor is the level at which banks lend to one another and it has a direct link to how much the rest of us pay for borrowed money.

Although rates have since eased to about 2 per cent, market watchers say the rise was a sure sign of troubled economic times ahead.

‘The spike reflects the spillover from the US funding freeze and also the increase in risk aversion in the local interbank market following the collapse of Lehman Brothers,’ said Citigroup economist Kit Wei Zheng.

‘But even before the Lehman collapse, domestic short-term interest rates were already facing some upward pressure because liquidity was normalising from previously very loose conditions.’

The Monetary Authority of Singapore (MAS) issued a statement last night saying that a ‘combination of a dislocation in global money markets and quarter-end funding pressures caused the Singapore- dollar interest rates to firm’.

And to ease market funding pressures, the MAS said it has kept a higher level of liquidity in the banking system through ‘its market operations’.

The MAS also said that it remains in close contact with market participants and is ready to ‘inject additional liquidity as required’.

However, economists say that move may provide only temporary relief.

‘Our view is that while the MAS’ liquidity injection may moderate the increases of interest rates, or even bring them down somewhat, it is quite unlikely that rates will regress to previous levels any time soon,’ said Mr Kit.

Source : Straits Times - 27 Sept 2008

Central banks pump billions to ease borrowing costs; markets on a yo-yo

Like a journey in the hills, stocks in Asia fell, rose and dipped again on a day when the world’s biggest central banks injected billions into banking systems in a desperate bid to unblock interbank markets and bring down borrowing costs.

The move came after US-dollar interbank lending rates in Singapore saw their biggest jump on record, following similar severe dislocations in interbank markets in the United States and Europe earlier this week.

In a statement published at 3pm Singapore time, six of the world’s biggest central banks - the US Federal Reserve, Bank of Canada, Bank of England, European Central Bank, Swiss National Bank and the Bank of Japan - said they would provide up to US$180 billion in additional funds to meet demand for US-dollar short-term loans worldwide.

The concerted attempt to ease borrowing costs came after interbank lending in some markets ground to a halt and interbank rates jumped to unprecedented levels as banks jealously hoarded cash and charged each other exorbitant rates to borrow funds.

Here, the one-month Singapore interbank offered rate or Sibor for US-dollar loans soared 48 per cent or 1.4 percentage points to 4.31 per cent yesterday morning before the intervention - its single biggest one-day jump on record and a stark indication of how the severe stress in financial markets worldwide is affecting even the interbank market here. On Monday, the rate was just 2.53 per cent.

Last night, the Monetary Authority of Singapore said the joint action by central banks yesterday afternoon appeared to have eased pressures in US-dollar markets, adding that it ’stands ready to inject additional liquidity’ if needed.

The Sibor is fixed at 11am daily by the Association of Banks in Singapore based on quotes by selected banks on what they expect to pay for interbank loans that day. Domestic interbank rates for loans in Sing dollars also rose, but far less sharply.

The dramatic developments meant that retail investors - those that still had the stomach to trade shares - were taken on a dizzying ride, as Hong Kong’s Hang Seng index plunged 7.7 per cent before staging a spectacular recovery to close flat after central banks in the US, Canada, Europe and Japan pumped a staggering US$180 billion into money markets to ease interbank lending rates.

The last time central banks took drastic action on such a large scale was in early March - when credit markets seized up, eventually causing investment bank Bear Stearns to topple.

Here, the Straits Times Index also staged an astonishing recovery, finishing virtually unchanged after plunging as much as 4.6 per cent earlier in the day.

In Japan, where trading ended before the official announcement of the central bank action, the Nikkei-225 index closed 2.2 per cent lower after falling as much as 3.8 per cent earlier.

Meanwhile, indices tracking the spreads on corporate credit-default swaps - a measure of the risk of the underlying companies defaulting on their debt - surged in Asia yesterday as investors sought protection from bank defaults on fears that more financial institutions would crumble.

In Russia, stock markets were shut most of the day - the third day of interruptions by trading suspensions to prevent a financial crash. The government said stock trading will resume today after it announced a slew of measures to restore investors’ confidence in financial markets.

‘There is no more important task for Russian authorities than supporting the financial system,’ President Dmitry Medvedev told Russian ministers, according to AFP.

The US financial sector is facing a ‘long workout’ of past excesses - chiefly an over-reliance on debt - but not a complete meltdown, said Gerard Lyons, chief economist at Standard Chartered Bank, in a report yesterday.

‘This deleveraging process still has some way to go, and requires a rebalancing of the economy. Private sector debt is still too high, and American consumers need to spend less, save more.

‘Caution, not pessimism, is required in 2009.’

Source : Business Times - 19 Sept 2008