Sibor, SOR up sharply as domestic funding conditions tighten

SINGAPORE'S domestic interest rates have finally shot up and are back to July levels as domestic funding tightens amid a weak Singapore dollar.

The key three-month Sibor (Singapore Interbank Offered Rate), used to price mortgages, rose to 0.91 per cent on Tuesday from 0.88 per cent on Monday after flatlining around 0.87 per cent since July. The year-high was 1.25 per cent on Jan 19.

The volatile three-month SOR (swap offer rate), a benchmark for commercial loans, was up sharply to 0.89 per cent on Monday, up from 0.78 per cent last Friday. After diving to the year-low of 0.48 per cent on Sept 26, it had been trundling below 0.70 per cent the past two months.

Said Eugene Leow, DBS Bank's interest rate strategist: "It took a big shock to Asia FX and the SGD over the past few days to push the SOR and Sibor up."

"The FX dynamics were able to overcome ample liquidity conditions in the system," he said.

The SGD has fallen as much as 2.2 per cent to S$1.42 against the US dollar since Nov 9 on worries the next US president, Donald Trump, will turn protectionist. It recovered a little on Tuesday afternoon to S$1.41.

Last Friday, the Monetary Authority of Singapore said it was ready to intervene to curb excessive volatility in the Singdollar as Trumpflation fears hit regional currencies.

According to OCBC Bank economist Selena Ling, the laggard reaction of the local interest rates is likely part of Asian markets waking up to the Trump reality.

"Probably Trump's victory last week and the ensuing bear-steepening of the US Treasury yield curve was a wake-up call for Asian markets, especially given the last few days of market volatility in both currency and bonds," said Ms Ling.

The benchmark 10-year US Treasury note yield rose as high as 2.30 per cent, its highest since early January, while a bond market gauge on investors' 10-year inflation expectations hit its highest level in over two years, Reuters reported.

"Market players are likely anticipating the probably FOMC (Federal Open Market Committee) December rate hike, coupled with tighter domestic funding conditions and weaker SGD. A bit laggard, but SGD forward and swap markets had already reacted earlier," she said.

There's now an 80 per cent chance that the US FOMC may vote next month to hike interest rates.

Underlying expectations of a Fed fund move in December probably also play a part in keeping rates supported, especially if we incorporate the view that a Trump administration could boost spending that could see inflation going higher, said Saktiandi Supaat, head of FX Research at Maybank Singapore.