|Swap Offer Rate negative; HK exchange hacked; Yield curve inverted; etc|
|Written by Wilfred Ling|
|Thursday, 11 August 2011|
More bad news ahead: The Swap Offer Rate or SOR has turned negative. Loosely speaking, the SOR represents the cost of borrowing in Singapore (although the exact formula requires a PhD to understand). Many mortgage loans are pegged to the SOR. The negative value is an indication that too much cash is being held by the bank that they are, theoretically speaking, paying people to borrow from them! Of course, they will not do that because it sounds pretty silly.
I read in the newspaper that some bankers say it is because investors are switching out of the US dollar and there are increased cash flows into Singapore. To me it means more inflation coming to Singapore – just when we do not need one! If there is going to be a greater threat of inflation coming, MAS would appreciate the Sing dollar double quick time so as to make imports cheaper. Thus, I reason the Sing dollar is going up double quick time! Woe to those who are holding foreign currencies! But for those who are exposed to foreign currencies investment, it is better to hedge the currency risk. I have already made deliberate attempt to hedge against the foreign currency risks in my clients’ portfolios. It is not 100% hedged but partially. At least this will mitigate the FX risk. If you do not know how to hedge or has no plan to hedge, it is time you consider someone who does.
In the meantime, the Singapore bond yield curve has turned slightly inverted. Based on 10 August 2011 closing prices, the yields for 3-months T-bills, 1 year, 2 year and 5 year are 0.19%, 0.21%, 0.16% and 0.48% respectively. As it can be seen that the SGS yield for the 2 year is lower than for the shorter durations. This means that the forward implied rate 1 year from now is lower than current 1 year rate. Layman language means there is a threat of recession.
I have clients who asked me when will it be a good time to buy property for investment and rental. The super low mortgage rate is also attractive. My advice is to assume a higher interest rate for the purpose of cash flow budgeting. As for rental earnings, a recession or a slow down in economy means lower rental. So do not assume that the rental is sufficient to pay off the mortgage installment. In fact, it is possible to be unable to find tenants if the recession becomes really bad!
The low interest rate environment means that it is a bad time to buy interest rate sensitive products. Interest rate sensitive products will be like long duration bonds which will suffer a lost when interest rate increases or when yield spread widens. I also consider endowments as interest rate sensitive because policyholders would be locking at the current low interest rate over many years. Thus, I discourage people from buying endowments for now. If you are looking into buying single premium endowments, regular premium endowments, anticipated endowment marketed as ‘annuity-type’ of gimmick products, this may not be the best time to buy.
I know there are many who are keen to buy when markets are falling down. But I always advice people not to catch a falling knife. If you do not want to be killed by the falling knife but wants to take opportunity during this time of crisis, ask your financial adviser what is the game plan. I am not surprised if there is no game plan.
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