This week we take a look at the historical trending between 3-month sibor (the blue line), a key lending rate for mortgages in Singapore, and 12-month fixed deposit rates (the red line) over a 28-year period since 1987 where earliest data is available. This would straddle the period of several recessions from Iraqi invasion of Kuwait in 1990 leading to oil crisis, Asian financial crisis in 1997, 9/11 terrorist attack in 2001 and the most recent global financial crisis of 2008. You see the plummeting of sibor rates corresponding to these periods.
It is interesting to note that it takes average of only 3-4 years for sibor to climb from its low base to next high in each of the 3 distinct periods of economic expansion over the past 26 years namely, 1987-1990, 1996-1998 and 2004-2006. So beware sibor can go up by 300 basis points or 3% over 3-year period as history has shown us, or an average climb of 1% per year.
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Another observation to note is that before the turn of the millennium historically sibor has hover above 3% p.a. for most of the time except for brief periods where it dropped below that into the 1-3% p.a. range. In fact at two of its highest points over the 26-year period, 3-month sibor had hit levels of 8% p.a. in May 1990 and 7.75% p.a. in Jan 1998. Since 2000 with one crisis after another and with the Great Recession of 2008 dealing a final blow to global economy, sibor has languished in the sub-1% since 2008 but this may be about to change.
Why do we compare sibor historical trending to fixed deposit (FD) rates?
We have been advocating DBS FHR (Fixed Deposit Home Rate) peg for home loan packages for some time now and more so recently with fixed rate mortgages going near and above 2% p.a. We have also been touting how this peg will prove to be more stable than the traditional sibor lending rate for your home loan. So I think it is time to look at it from a historical perspective.
DBS FHR was launched in Jun 2014 and it is defined as the average of their prevailing (or daily published board/rack rates) 12-month and 24-month Singapore dollar fixed deposit rates for amounts of between $1000-9999, currently still at 0.25 and 0.55 respectively hence FHR is at 0.40% p.a. Unfortunately we only have historical data for 12-month fixed deposit from MAS website but it would suffice for the purpose of this study which is to uncover the pricing strategies of banks for fixed deposits in relation to sibor movements. In any case you could imagine roughly a 15 basis points or 0.15% above the red line as the FHR (green line) before Jun 2014. However do note that MAS data comprised of fixed deposit blended rates from all banks or notably the 3 local banks, not just DBS bank per se.
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The general conclusion you can draw over the 28-period is that in periods of rising sibor rates (eg. 1987-1990, 1993-1994, 1996-1998, 2004-2006) FD rates tend to go up less or trade sideways when compared to sibor. In other words it is less volatile as evident from the narrower band of swings from top to bottom in each cycle as opposed to sibor. However that also means the converse is true and when sibor is on a downtrend (eg.1990-1992, 1994-1995, 1998-1999, 2001-2003, 2006-2011) FD rates becomes less elastic and borrower is better off on sibor pegs where their borrowing costs come down more and quicker.
It is somewhat intriguing to note that the local banks seemed to be flushed with funds since the start of the millennium where banks continue to pay out meagre interests for fixed deposits even when their interest margin soar with rising sibor 2003-2006. Perhaps this is one way to motivate clients to put their funds to better use in investments with the bank.
In conclusion our assessment of FHR being a more stable and less volatile peg for mortgage loans is likely to be accurate and borrowers will tend to benefit more in periods where rates are going up like in the next few years, especially if the local banks continue to be flushed with liquidity in the system. However that might change as borrowers begin to pay down their mortgages in droves when sibor goes above 3%, leading to exodus of funds from the bank and the subsequent rise in FHR. We will cover that in greater details and other shortcomings of FHR in another article so stay tuned to this blog.
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