The latest move by US Federal Reserve has largely vindicated our recommendation since the start of 2019 that it’s about time to go back to SIBOR-pegged home loans.

In a dramatic reversal of its policy to continue to tighten rates in its last FOMC in December, the Fed walks back on its forecasted two hikes to now none for 2019, and only one hike expected in 2020!  I call it a marked reversal in monetary policy from a year ago, when the Fed had initially forecasted four hikes in 2018 (which it did), and three hikes for each of 2019 and 2020.  And coming on the back of four consecutive hikes in 2018, to drop off all of a sudden to just one hike in the next two years is nothing short of spectacular.

Even we ourselves were caught by surprise the overly-dovish tone of the Fed in its latest March FOMC statement.  We have expected the pace of rate hikes to slow going forward as it is inconceivable that the Fed could continue to hike 9 times over the next three years as it did before, when inflation continues to stay muted.  In fact, with Fed funds rate at just below 2.50%, we have previously argued that we could be near the long-run neutral rate – which also means we could be near the end of the rate hike cycle.  For this reason, we believe it is worth taking a bet on floating rate home loans now by switching back to SIBOR pegs, instead of paying for sky-high fixed rates.  And that has been our recommendation since the start of this year.

We will explain shortly why SIBOR when the cycle is near its end.  But first let us summarize the highlights of Fed’s March FOMC statements:

• Fed has recognized some slowdown in US economy by adjusting GDP forecast downwards from 2.3% to 2.1% for 2019, and similarly from 2% to 1.9% for next year. It remarked “economic activity has slowed from its solid rate in the fourth quarter”.
• It also revised up unemployment rate to end 2019 at 3.5% up from 3.7%, which may not be a bad thing as a tight labour market will continue to support wage growth which has registered a nine-year high of 3.4% in February.
• Still the mystery on why solid wage gains does not translate into higher inflation lingers on. Fed’s preferred inflation measure is now expected to hit only 1.8% by end of 2019, from its earlier projection of 1.9%.

In another surprising announcement on its balance sheet action, the Fed said it will now cease by September this year what was once touted as an “auto-pilot” asset sale programme, which has the effect of raising long term rates gradually over time.  This is the unwinding process for its huge balance sheet of US$4.5t acquired during the three rounds of QE (quantitative easing) in the last financial crisis.  With the announcement, Fed would now stop short of its targeted reduction of assets to US$3.5t, instead of the original US$3t.  In an earlier article, we mentioned this “twin effect” of monetary tightening from both raising short-term rates through Fed funds rate, and long-term rates through asset sale.  Come September, both effects would come to an end

Overall, the Fed has signalled that the “US economy is in a good place” in a bid to strike a balanced tone in its outlook.  We believe Fed seems to have achieved the long run neutral rate (neither accommodating nor restricting growth) at near 2.50% for the next two years, but there is still a chance of another hike towards end of the year depending on the outcome of the trade talks between US and China and if the global economy manages to get back on the growth path from the current slowdown.

With that said, we are likely to revise our own forecast (we review only mid-year after June’s FOMC) down from the current two hikes to one for 2019 but it means SIBOR is unlikely to move up much in the year.  And we will not be surprised it may even dip somewhat in the short term.  I have read some analyst projecting 3-month SIBOR to hit 2.30% by end of third quarter.  Analysts tend to be overly-cautious in their forecast in the past years when rates were hovering below 2% and now that rates are above that, they tend to go too aggressive.  With just one hike now, we are likely to see 3-month SIBOR hitting a high of only 2.10% by end of the year, if at all.  1-month SIBOR will be even lower.

With long term rates now coming down in the US and the yield curve close to inverting, there is revived talk of a recession just round-the-corner as an inverted yield curve has predicted many of the recessions in the US.  There may be some truth in that as typically the Fed would pause on its rate hikes when there are signs of imminent slowdown in economic activity and it will not be surprising that a slow down materialize like typically a year after such pause.  No one can foretell a recession with 100% accuracy but we are certainly at at a higher risk of that now than before, with a bull run that has stretched over 10 years since 2009.

Should the cycle really reverse and the Fed has to cut rates to support a slowing economy, here in Singapore SIBOR would be the first to come down as opposed to other mortgage pegs like BOARD or FDR.  Many bankers talked about SIBOR being volatile and not the best peg for home loans but it is precisely because it responds immediately to liquidity situation in interbank that makes it volatile.  We say when rates go on a downtrend, the volatility works to the advantage of a homeowner who would see his monthly repayment adjusted down immediately, especially for those on a 1-month SIBOR.

If you are keen to take advantage of the current price war on SIBOR home loans where some banks are slashing their spreads down to unprecedented levels never seen before in Singapore (as far as I can remember), do contact our team here at MortgageWise.  Not only can we help you choose the right SIBOR package for your home loan, you will also receive a $150 Refinancing Valuation Fee Offset, or a special rate of $1,800 Purchase Legal Fee (includes stamp duty & gst) when you buy Singapore condo with a loan through us, both subject to min loan of $500,000.  Terms and conditions apply.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.