Two US tipping points for S’pore investors

THE United States reached two tipping points last week that could have important implications for investors around the globe, including property owners in Singapore who may find they have to pay more on their mortgages.

The first tipping point came on Tuesday, when there was a historic inversion between the yields for 10-year US Treasury notes and swaps.

This shift means that the interest rate for these US Treasuries, which are usually perceived as lower risk than corporate bonds because they are obligations of the government, was higher than the interest rate for swaps for the first time.

Moreover, there was weak demand in the auctions for 2-year, 5-year and 7-year US Treasury notes last week.

Analysts cited multiple causes for this historic shift. Changes in hedging practices by two big US mortgage corporations, Freddie Mac and Fannie Mae, as well as traders’ incorrect bets on interest rates were part of the reason.

So too were the upcoming end of the first quarter as well as fears about debt in Greece and Portugal.

Further, the rapid growth in US Treasury notes issued may be increasingly difficult for the market to absorb, with investors perceiving some corporate bonds to be safer than government debt.

The net result is that the US Treasury may need to continue to pay higher rates to ensure it sells enough notes. As interest rates for Treasuries rise, mortgage and other interest rates may rise too.

Indeed, the

The second tipping point came on Wednesday, when the

Unemployment remained above expected levels and payroll growth stayed below forecasts, so a shortfall ensued when Social Security taxes decreased while the number of people applying for Social Security benefits increased.

Social Security in the US is similar to the Central Provident Fund (CPF) in Singapore in that it provides retirement income for Americans.

A key difference, though, is that CPF account holders own the money in their accounts whereas Social Security revenue is put into a common pool to fund future payouts.

When revenue exceeded disbursements, something that was expected to continue until about 2016, the US government used the extra money from this pool to purchase US Treasuries.

Now, however, the surplus that was expected to be available no longer exists and the US Treasury needs to make up a gap of about US$30 billion ($42 billion).

While the gap is small in relation to the total US deficit, it has created a change in mindset and interest rates may need to increase to attract investors to make up the difference.

Does something so far away and perhaps unfamiliar matter in Singapore?  Yes, it does. For one, it means that interest rates may well rise here and in other countries sooner than earlier expected.

Even though the US Federal Reserve has kept its benchmark overnight federal funds rate at nearly zero per cent, the rate the US Treasury pays for its borrowings affects other rates.

As the US Treasury pays higher rates to meet increased funding needs while demand for its notes weakens, mortgage and other interest rates in the US and Singapore could also rise.

For another, bond unit trust prices could fall. Since the price of bonds goes in the opposite direction from interest rates, rising interest rates mean lower bond prices. And the change could affect foreign exchange rates, too, with the US dollar weakening if the US is viewed as a higher-risk country.

Reaching these tipping points doesn’t necessarily mean overnight changes.

The timing and the level of increases in interest rates are uncertain.

The shifts could be ameliorated in the short term if, for example, US unemployment drops quickly or the US Treasury borrows less or the debt situation in Europe is swiftly resolved.

But with two inflections at once and the likelihood of slower US borrowing remaining low, a rise in interest rates and a concomitant drop in bond prices could happen here sooner than expected.Wall Street Journal reported that US mortgage rates rose above 5 per cent last week.New York Times published an article revealing that the payout from Social Security will exceed revenue starting this year instead of six years from now.

Tuesday, 30 March 2010

HK propo ses new Transparency Laws

Hong Kong yesterday announced plans to introduce laws that ensure listed firms disclose price-sensitive information early, with those who fail to do so being fined up to HK$8 million ($1.44 million).

The proposal was put forward avoid a repeat of the Citic Pacific scandal, when the listed conglomerate revealed in 2008 that it faced a HK$18.6 billion loss from rogue currency bets.

The company said it kept the information secret for weeks in order to unwind the trades, a decision that drew public outrage and regulatory attention to how the city’s listed companies disclose information.

Apart from fines, the director or officer in breach of the laws could be disqualified from office, or be deprived of access to market facilities, for up to five years.