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The Masked Tulip

Any Sign Of Higher Irs?

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I thought I read on here in the early hours of this morning that some analysts think IRs will begin heading up by as early as the Autumn - can't find the thread now.

Did anyone else read it and, if so, what was the reasoning for the move upwards - was it just the banks wanting to make money on mortgages or was it somewhat more fundamental to the economy?

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I thought I read on here in the early hours of this morning that some analysts think IRs will begin heading up by as early as the Autumn - can't find the thread now.

Did anyone else read it and, if so, what was the reasoning for the move upwards - was it just the banks wanting to make money on mortgages or was it somewhat more fundamental to the economy?

I'd say that shortly investors will be looking for a higher rate of return on GILTS issued by the UK government, what with the recent warning from S&P about a potential drop in the countries rating and the ever increasing government borrowing which increases the risk of us defaulting. Higher interest rates will be expected in return for the higher risk in lending to the UK. No link but that's my understanding of the current situation.

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I had always thought that the BoE base rate was losely "pegged" to the yield on gilts due to the way that we as a nation "raise" cash.

How can the BoE lend at 0.5% if they can only borrow at 3%?

or:

A ) do I completely misunderstand the mechanism

B ) it is some how distorted by QE

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Here's a LINK to the Gilts thread.

And this from a post by FreeTrader: (LINK)

Edit: Just for comparison, here are the yields at the recent auctions for this particular gilt:

19 Mar: 2.520%

16 Apr: 2.839%

21 May: 2.911%

In two months the yield on the 2.25% 2014 gilt is up 39bps.

ED: A certain Hamish was viewing the thread but seems to have vanished... :blink:

Edited by yellerKat

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Here's a LINK to the Gilts thread.

And this from a post by FreeTrader: (LINK)

In two months the yield on the 2.25% 2014 gilt is up 39bps.

Mean, in the background gilt rates are rising and so that will lead through to the IRs we all know and love.

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IR to stay @ below 1% for 2009 into early 2010.

Then who knows..... Up but not to the levels some on here talk about.

5 - 8% is going to be the max when it happens

What to you define as "interest rate"

Base rate, svr lending rate, or rate to cash savers.

NS@I just increase rates on its income bond by 100% to 2% monthly. (a 100% rise out of the blue)

Two months ago you could find only a small number <10 banks and bs offering >4% on 2 year fixed, yet as of today there are > 70.

Looks like 0.5% base rate means for diddly squat.

And yes debt and risk multiplied by demand for cash by banks: will force higher ruturns for those with money.

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If China droped the peg to the dollar, things could change so very fast. We have seen over the last year the massive swings in currency exchanges, I dont know if something is definately going to happen, but if something does, things will move very very quickly.

If that was the case, the bank of england and the fed would have to take drastic action themselves. That would either be raising interest rates OR stepping up quantitative easing to zimbabwean proportions.

Everyone seems to say things like interest rates are going to go up next year, as though these things happen slowly. They dont. If the debt problem gets out of control and the system breaks down, you bet your ass that interest rates can rise very quickly indeed.

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What to you define as "interest rate"

Base rate, svr lending rate, or rate to cash savers.

NS@I just increase rates on its income bond by 100% to 2% monthly. (a 100% rise out of the blue)

Two months ago you could find only a small number <10 banks and bs offering >4% on 2 year fixed, yet as of today there are > 70.

Looks like 0.5% base rate means for diddly squat.

And yes debt and risk multiplied by demand for cash by banks: will force higher ruturns for those with money.

My gut feeling is that banks and BSs are trying to lock savers into long-term bonds now because they know IRs will rise before the year is out.

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I had always thought that the BoE base rate was losely "pegged" to the yield on gilts due to the way that we as a nation "raise" cash.

How can the BoE lend at 0.5% if they can only borrow at 3%?

or:

A ) do I completely misunderstand the mechanism

B ) it is some how distorted by QE

Just answered my own question :rolleyes:

Long term gilt yields are about 3.5% - 4.5%, short term ( < 1year ) is 0.5%. Presumably this is how it is working.

So if we want to know where base rates are heading, we could do worse than to keep an eye on short term gilt yields.

(Happy to be corrected if I am talking out of my backside :) )

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Just answered my own question :rolleyes:

Long term gilt yields are about 3.5% - 4.5%, short term ( < 1year ) is 0.5%. Presumably this is how it is working.

So if we want to know where base rates are heading, we could do worse than to keep an eye on short term gilt yields.

(Happy to be corrected if I am talking out of my backside :) )

Well, you may be talking out of your backside still, but I think you have got it right.

Interestingly, that is where short term gilt rates are now but where they might be by the end of Summer, Autumn, end of the year will be interesting. I suspect they will be moving up and hence why I think that BOE IR rates will begin rising sooner than many expect.

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IR to stay @ below 1% for 2009 into early 2010.

Then who knows..... Up but not to the levels some on here talk about.

5 - 8% is going to be the max when it happens

i agree- any higher than 6% would be too much for debt-laden Britain

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i agree- any higher than 6% would be too much for debt-laden Britain

not true.

IR is the cost of NEW borrowing, it doesnt relate to servicing existing debt (other than those inflation linked doobries in murvs pension pot).

..one would expect at some point tax revenues to equal govt spending (maybe 4 years off), and then all bets are off - could easy go 8-10% IMO

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I just had a glass of Jack D with my evening meal - I am now confused by own thread. What is going on? Where is the original?

Watch that JD - she is a fickle mistress. Last time I tasted her sweet flavour I had to be roused from the bath at 4 in the morning by the good lady in a rather shambolic state.

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I have a question:

The treasury issue guilts so therefore they set the yields when they are issued, right?

But the BoE sets the base rate. So how is it that the yields on new guilt issues (which are set by the treasury) can influence the BoE base rate? Can somebody describe the mechanism? Or am I talking cr@p?

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They will run the BoE rate low for longer than people think, because they want inflation back in the system and they do not want to cut of any sign of a recovery too quickly. They have to get the fiancial services sector making decent profits again (one way to do this is keep the BoE rate low to increase margins) as they need the tax take and they are not going to be able to build a brand new low carbon manufacturing economy in 2 years.

I would be surprised if you see a rise in the BoE rate before 2011.

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The treasury issue guilts so therefore they set the yields when they are issued, right?

But the BoE sets the base rate. So how is it that the yields on new guilt issues (which are set by the treasury) can influence the BoE base rate? Can somebody describe the mechanism?

Not exactly.

As I understand it the treasury (DMO) holds an auction and attempts to get the best (lowest) yield they can. The less demand, the higher the yield they have to offer to raise all of the money needed.

So it is the market that determines the yield on gilts (and therefore as I understand it the market that has a lot of control over where the BoE rate can be set.. [although I am more hazy about that bit]).

[Edited for clarity.. It's hard to post when there's only a 5 min break in Britain's Got Talent ;) ]

Edited by libspero

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Not exactly.

As I understand it the treasury (DMO) holds an auction and attempts to get the best (lowest) yield they can. The less demand, the higher the yield they have to offer to raise all of the money needed.

So it is the market that determines the yield on gilts (and therefore as I understand it the market that has a lot of control over where the BoE rate can be set.. [although I am more hazy about that bit]).

[Edited for clarity.. It's hard to post when there's only a 5 min break in Britain's Got Talent ;) ]

Thanks - yes it's that last bit I can't get my head round. Why would the BoE feel pressured to increase the base rate, just because the treasury has had to increase guilt yields? Are they in competition to sell debt?

[Edit - I can see why guilt yields need to increase because interest rates have gone up. But that's because there is pressure to sell guilts. Where's the pressure for the BoE to increase interest rates though?]

Edited by LiveAndLetBuy

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Thanks - yes it's that last bit I can't get my head round. Why would the BoE feel pressured to increase the base rate, just because the treasury has had to increase guilt yields? Are they in competition to sell debt?

Because we will all start taking our money out of banks and start buying gilts thereby making banks insolvent.

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So it is the market that determines the yield on gilts

In an ideal world, only the BoE are indirectly purchasing a great deal of these gilts using bond traders as middlemen so whatever the yields, they're already artificially low.

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In an ideal world, only the BoE are indirectly purchasing a great deal of these gilts using bond traders as middlemen so whatever the yields, they're already artificially low.

I see what you mean, except I thought they were only buying long dated gilts (10 year+)?

To clarify my reasoning (partly for my own benefit):

The BoE lends to other banks at the prevailing BoE base rate. To be able to do this it must be able to raise money itself at a similar (or lower) rate.

The only way I can think of that the BoE could fund this is by selling assets, printing money or raising money by selling short dated gilts at around the 0.5% current market rate.

I don't believe that they are selling assets (or have sufficient assets to sell) so that leaves raising money or QE. I didn't think they were applying QE like this so I have ruled that out... leaving raising the money from the markets. But if they are selling short term gilts that would mean they would have to keep rolling these over at the end of each term for the total amount borrowed plus any additional borrowing they hope to do. While people are trying to stay relatively safe and liquid I can see why they might be prepared to lend to the BoE for short terms at very low rates. As investors regain confidence they would want to diversify away from this safe haven into other assets and I could see that forcing up short term gilt yields.

If my reasoning is correct this would force up BoE base rates.

Can anyone shed any light on this without me having to ask noob questions on the "gilts" thread?

Edited by libspero

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In the last few weeks rates paid to savers on 2 year bonds have gone up by about 1% from 3-4%

I started about 3 threads on this subject, but no one seems particularly interested in this development

People just keep going on about only getting 0.5% on savings??????

Interest rates seem to be rising.

:blink:

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i had said about 6 to 8 wks back rates would rise from june09, but i was arong, doesn't look likely now not withstanding what strlondon says below, although the out the blue ns&i rise last week kind of vindicates me a wee bit

What to you define as "interest rate"

Base rate, svr lending rate, or rate to cash savers.

NS@I just increase rates on its income bond by 100% to 2% monthly. (a 100% rise out of the blue)

Two months ago you could find only a small number <10 banks and bs offering >4% on 2 year fixed, yet as of today there are > 70.

Looks like 0.5% base rate means for diddly squat.

And yes debt and risk multiplied by demand for cash by banks: will force higher ruturns for those with money.

indeed sir thats my hope

Everyone seems to say things like interest rates are going to go up next year, as though these things happen slowly. They dont. If the debt problem gets out of control and the system breaks down, you bet your ass that interest rates can rise very quickly indeed.

quicker than most doggers pack up and leave when they see bright yellow hi vis jackets approaching in the middle distance

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