The Truth About SIBOR & SOR
http://www.hnworth.com/article/2017...ning-wild-part-2-sibor-sor-or-a-new-benchmark
Background:
Singapore government t-bills are paying a higher rate than Sibor which is an anomaly. The SOR trades even lower than Sibor which makes it cheap for offshore folks to make more money than locals who borrow in Sibor.
Sibor’s use largely restricted to the home loan market. DBS and other local banks have started to peg home loan rates to their fixed deposit rates which are solely in their control.
What is SOR? Who gets SOR?
SOR is derived from forward points supposedly to represent the interest rate differentials between Libor and SGD rates expressed in exchange rate terms, throwing in several other factors such as demand and supply and the big Section 757.
The trick of Section 757 is that not everyone can access SGD borrowings in SOR or Sibor because it is the privilege of only onshore tax residents/entities, to be able to borrow more than S$ 5 million unless it is explicitly for the purpose of buying SGD assets.
Assuming:
· We have the 1M Sibor at 1%, unchanged for the past 3 months.
· 1M SOR was last at 0.86%.
· 1M t-bills issued by the Singapore government is 1.15-1.25%, on average.
That means that anyone with access to USD at Libor will be able to buy 1M Singapore government bills at 1.25% and pay just 0.86% for it, earning 0.39% in a month instead of borrowing at 1% (Sibor) and make less.
Why is SOR So Much Lower than Sibor?
· Not everyone has USD to swap into SGD to take advantage of the lower SOR
· Banks are flushed with SGD customer deposits that they pay virtually nothing for while lending the money out at Sibor
· Sibor just does not trade a lot and is based on “expert opinions” these days
Starting to Look Unfair on the Home Loans
Home loans are generally going at Sibor+0.5% but, in DBS is offering their new fixed deposit home rate loan at 0.25% (9m Fixed Deposit rate) + 1.15% = 1.3%.
Why 9 month? How does DBS determine the rate? DBS has full control!
[Bizarre as it seems, some credit trader we know still prefers to pay 1.68% for 3 years fixed because that means they are only paying 3Y+0.05%]
Yet banks cannot afford to let customers take those SOR loans anymore given its unstable and volatile history, fixing at negative rates in 2011, against the interest of the banks even if SOR is mostly always lower due to our monetary-without-interest-rate policy.
Conclusion…
The flaw in Sibor is that it is just a benchmark based off, mostly, expert opinions (that we do not doubt) and yet the best “experts” who divine the rates each day are also probably the people with vested interest in the not much-traded product.
Those loans against DBS’s 9-month fixed deposit rate would be just as “expert” as Sibor and last we heard, MAS is still the central bank even if the Singapore government is borrowing 1-month money at a higher rate than Sibor these days.
FHR - DBS Fixed Deposit Home Rate
http://www.hnworth.com/article/2017...ning-wild-part-2-sibor-sor-or-a-new-benchmark
Background:
Singapore government t-bills are paying a higher rate than Sibor which is an anomaly. The SOR trades even lower than Sibor which makes it cheap for offshore folks to make more money than locals who borrow in Sibor.
Sibor’s use largely restricted to the home loan market. DBS and other local banks have started to peg home loan rates to their fixed deposit rates which are solely in their control.
What is SOR? Who gets SOR?
SOR is derived from forward points supposedly to represent the interest rate differentials between Libor and SGD rates expressed in exchange rate terms, throwing in several other factors such as demand and supply and the big Section 757.
The trick of Section 757 is that not everyone can access SGD borrowings in SOR or Sibor because it is the privilege of only onshore tax residents/entities, to be able to borrow more than S$ 5 million unless it is explicitly for the purpose of buying SGD assets.
Assuming:
· We have the 1M Sibor at 1%, unchanged for the past 3 months.
· 1M SOR was last at 0.86%.
· 1M t-bills issued by the Singapore government is 1.15-1.25%, on average.
That means that anyone with access to USD at Libor will be able to buy 1M Singapore government bills at 1.25% and pay just 0.86% for it, earning 0.39% in a month instead of borrowing at 1% (Sibor) and make less.
Why is SOR So Much Lower than Sibor?
· Not everyone has USD to swap into SGD to take advantage of the lower SOR
· Banks are flushed with SGD customer deposits that they pay virtually nothing for while lending the money out at Sibor
· Sibor just does not trade a lot and is based on “expert opinions” these days
Starting to Look Unfair on the Home Loans
Home loans are generally going at Sibor+0.5% but, in DBS is offering their new fixed deposit home rate loan at 0.25% (9m Fixed Deposit rate) + 1.15% = 1.3%.
Why 9 month? How does DBS determine the rate? DBS has full control!
[Bizarre as it seems, some credit trader we know still prefers to pay 1.68% for 3 years fixed because that means they are only paying 3Y+0.05%]
Yet banks cannot afford to let customers take those SOR loans anymore given its unstable and volatile history, fixing at negative rates in 2011, against the interest of the banks even if SOR is mostly always lower due to our monetary-without-interest-rate policy.
Conclusion…
The flaw in Sibor is that it is just a benchmark based off, mostly, expert opinions (that we do not doubt) and yet the best “experts” who divine the rates each day are also probably the people with vested interest in the not much-traded product.
Those loans against DBS’s 9-month fixed deposit rate would be just as “expert” as Sibor and last we heard, MAS is still the central bank even if the Singapore government is borrowing 1-month money at a higher rate than Sibor these days.
FHR - DBS Fixed Deposit Home Rate
