Rude awakening: Here's the real deal behind the SIBOR's recent volatility

There are three culprits behind the uptrend.

The steady climb of Singapore’s short-term interest rates--namely, the SIBOR and the SOR--has been hogging the headlines of late, and for good reason. Higher short-term rates could spell higher mortgage and loan payments for homeowners and SMEs, while banks face the risk of deteriorating asset quality should their debtors default.

According to UOB Kay Hian, the rate uptrend has been caused by three main factors. The first culprit is the stronger US dollar. This has reduced the attractiveness of holding SGD assets, and the resulting outflows reduce the availability of SGD funds.

The second main reason for the volatility is the lingering expectation that the US Federal Reserve may hike rates sometime in 2015.

Lastly, there is also the upward lift on short rates due to the new MAS regulatory requirement which requires banks to maintain a Liquidity Coverage Ratio (LCR) of 100% against their net 30 days SGD assets outflows. This took effect on the first of January and further added to demand for liquidity just when the attractiveness of USD is reducing supply.

“The last six years of rates stability is indeed an exceptionally long time, and consequently complacency sets into market psyche as the benign markets are continuously extrapolated into the next period.. Recent volatility in SOR is higher than historical norms but not significantly higher. SIBOR has spiked higher in 2015 and considering that the move comes after a long period (6 years) of essentially zero volatility, the move in SIBOR has generated interest and concern. That said, when compared against the long term, recent volatility in SIBOR is still about half its historical norms. The return of volatility in SIBOR still has some way to go before returning to long term levels,” stated UOB Kay Hian