3-month SOR tumbles amid flush liquidity conditions, back to early Feb level

LOCAL interest rates continue to fall amid flush liquid market conditions.

The three-month SOR or swap offer rate has been tumbling since late April and at 0.7683 per cent on May 9 is back to early February levels. The three-month SOR is a benchmark used for corporate loans.

The three-month Sibor or Singapore interbank offered rate, a key rate to price home loans, has been relatively stable; it has been at 0.9985 per cent since last Friday.

Interest rate strategists list several factors for weak interest rates, including benign financial markets leading to flush liquidity and expectations that the US dollar (USD) will not rally much.

There's "low volatility across financial asset classes, which helped to attract emerging market inflows", said Victor Yong, United Overseas Bank (UOB) interest rate strategist.

"Overall volatility is low ... investors are fairly disillusioned with the Trump reflation story, (but) money still has to be put to work," said Mr Yong.

Capital flows into the region have depressed the SOR, he said.

Eugene Leow, DBS Bank interest rate strategist, said the low SOR reflects market expectations for the US dollar.

"Market participants do not seem keen to hold the USD, probably as a result of decreased expectations of USD strength," said Mr Leow.

This trend has been putting down pressure on the three-month SOR, said Mr Leow.

The USD has been rising since Tuesday, and stood at S$1.41 on Thursday.

UOB's Mr Yong said he still expects another two rate hikes from the US Federal Reserve this year and "SORs will adjust higher alongside, albeit at a unhurried pace if domestic liquidity conditions and financial volatility remain benign".

Mr Yong worries that the current benign sentiment makes for a "potent mixture" where investors are buying into all asset classes and may not be a "stable equilibrium".

He noted that the geo-political tension in North Asia hasn't make much of an impact on the financial assets side.

Flush liquidity makes for "very forgiving" conditions, where everybody looks at the same data and buy their favourite asset class, he said.

The Straits Times Index has risen 13.3 per cent year to date and is up some 19 per cent from a year ago.

The Singapore dollar (SGD) bond market has been hitting multi-year highs since April 21; the Markit SGD corporates total-return index stood at 121.2594 on Wednesday, fractionally off its 121.2829 peak on Monday.