Federal Reserves may start unwinding the $4.5 trillion in bonds on its balance sheet starting this year.
This is significant due its sheer size and the impact it could have on markets, which will most likely result in a rate hike. In fact, shrinking the balance sheet can affect interest rates in several ways.
First, if the Fed no longer buys mortgage securities, mortgage rates could rise simply because one big, steady buyer from the market would have been removed. Secondly, treasury rates could rise if it no longer replaces those securities, and that can affect the rates of home mortgages and other loans as well.
From a consumer's point of view, it is important to take note that SIBOR (Singapore Interbank Offered Rate) seems to track the movements in the US Federal funds rate & followed the direction of the Fed rates as well.
In view of this, and coupled with the Fed's possible decision to fasten the pace of rate hikes ahead, consumers with their home loans pegged to SIBOR should consider their options carefully now.
Jason Ow S. H.
Senior Financial Consultant