By now, many would have heard of US Fed’s emergency rate cut of 50 basis points (0.50%) last evening (3 Mar 2020), which happened outside of FOMC meeting.

The financial markets initially rallied within minutes of the sudden announcement by Fed but subsequently reversed that with both Dow Jones and S&P ended the day almost 3% lower at 25,917 and 3,003 respectively.  It seems that the bet taken by Fed to surprise the market may have backfired. Worst, Fed continued to dwindle down on its limited ammunitions with the federal funds rate falling by half from its peak of 2.25-2.50% last July.  With the latest cuts, it’s now at 1.00-1.25% and the futures slowing pricing in a further 25 basis points cut when the Fed meets again for FOMC 17-18 March should the virus situation worsens.

The move sent US 10-year Treasury yields crashing below 1% as investors and funds pile up on treasuries and bonds in a flight to safety.  Fed Chair Jerome Powell explained in the news conference that the Fed decides to take early action as it views “the coronavirus poses evolving risks to economic activity”.  Still, the market got spooked by the pre-emptive move and worry now more than before that the situation is going to get much worse than initially thought.  In other words – the steep cuts of 0.50% might have just gone to waste, and any attempt later to re-instate those 50 basis points might be easier said than done.

The major concern now is that the Fed is down with just four more rate cuts of 25 basis points each to go, before the fed funds rate reaches zero.  We hope the situation does not worsen so much as to warrant more cuts over the next few months.  Otherwise, there will be nothing much left that the Fed can do to tackle the next crisis after coronavirus.

What does all that mean for SIBOR here in Singapore?

Well, in a short space of just weeks, 1-month SIBOR has tumbled from 1.68% to 1.46701% (as of 5-Mar) and hurling towards the 1.40% barrier and may even break that we shall see.  The 3-month SIBOR has also correspondingly dropped to 1.47101%.

On hindsight, we are glad to have made that call more than a year ago at the start of 2019 to favour SIBOR floating rate home loans over fixed rates.  Back then fixed rates were hovering at 2.48% level.  It makes no sense for us to ask clients to refinance at such high fixed rates as we simply do not believe US Fed can continue to hike at the same pace as before (9 hikes over 3-year period) to bring fed funds rate from 2.50% then all the way to 5%!  Inflation is just not picking up to justify such aggression.  Markets will crash.  We favour a floating rate that will rise at snail pace or go flat.

True enough, US Fed made a policy U-turn in March 2019 and did three cuts in quick sucessions to bring the funds rate back down to 1.75% before the year is over.  As a result, 3-month SIBOR tumbled from 2% to 1.80% range for the most parts of 2019 and banks started adjusting fixed rates lower and lower by the month. By the time fixed rates started dropping below 1.90% as we start off 2020, we think it’s ok for clients to reconsider fixed rate home loans.  Provided they are well aware of and are prepared for some further downside should SIBOR continue to slide.  But we think the downside is limited as we are nearing some base level support.  Our forecast was for SIBOR to trade pretty much 1.60-1.80% range-bound for the rest of the year.

Then came coronavirus global pandemic which no one saw coming.  SIBOR has now broken below our forecasted range and we have to adjust that down to 1.30-1.50 range.  Which also means you will likely see fixed rates moving down to 1.50% range soon.

What will also happen (and we know this from experience) – when SIBOR tumbles, banks will slowly start to adjust the spreads up for new home loan packages.  In fact, when SIBOR was below 1% for long periods historically, spreads on SIBOR loans have consistently stayed above 0.60% even during the promotional year 1 to 3!

So, for those with lock-ins ending within the next 6 months, there’s no better time to switch back to floating rate home loans on SIBOR and lock down such low spreads whilst they last.  Speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, or to buy your next Singapore property, speak to our dedicated team of mortgage consultants here for the best home loan rates.