When Will Interest Rates Rise?

[Optobear]

However much I wish for the great house price decline, I can't see it happening until interest rates move back up to levels that are at least around the long term average, so that people start to feel the pain from their overextended borrowings. So the question is when will that happen?

My hypothesis is that it won't happen until the FED raise rates in the US? If you look back at UK and US base rates it is almost always the case that UK rates are a little higher than US base rates, sometimes they've been much higher, only very rarely lower.

So what will trigger a rise in US rates? That will (by my hypothesis) be what it takes for us to raise rates in the UK back to the historical average - and that is when the fun begins!

My hypothesis also means that our base rates have nothing at all to do with the muppets in Bank of England MPC!.

Thoughts?

Optobear

[Optobear]

I'm quoting myself here but I think the point is relevant.

I don't think rates will rise unless there is a run on the currency. That is the only thing that will make them change tack.

Inflation is in the plan, you see. They have to have it. They have to pretend that their target is low inflation. In reality their target is moderate to high cost push inflation with little/no wage inflation --> this makes the UK economy 'more competitive' - so you see, you WILL be ripped off as a saver. It's in the plan. They just have to pretend to tackle the problem and fail.

I take the point, but the government still need to borrow money, and they need to issue gilts

if you look at the Debt Management Office

http://www.dmo.gov.uk/reportView.aspx?rptCode=D2.1prof7&rptName=77111048&reportpage=Summary_of_results

you'll see that they are having to pay well above 0.5% to get the debt away. So the 0.5% isn't really even the base rate that the Government have to pay at the moment.

Furthermore, the yield curve, and the prices of the longer dated gilts at issuance are close to 4-5% (ie long term trend), so it has to revert?

What do people think is the point of the 0.5% base rate if even the government can't borrow at that rate?

[Charlie The Tramp Returns]

I can't see it happening until interest rates move back up to levels that are at least around the long term average,

What around 8% the savers would pray for that.

[Guest The Relaxation Suite]

I'm quoting myself here but I think the point is relevant.

I don't think rates will rise unless there is a run on the currency. That is the only thing that will make them change tack.

Inflation is in the plan, you see. They have to have it. They have to pretend that their target is low inflation. In reality their target is moderate to high cost push inflation with little/no wage inflation --> this makes the UK economy 'more competitive' - so you see, you WILL be ripped off as a saver. It's in the plan. They just have to pretend to tackle the problem and fail.

A neat little post that just about sums it up. The annihilation of pensioners and savers and the prudent so the rich and indebted can be saved (government & big business).

[exiges]

I take the point, but the government still need to borrow money, and they need to issue gilts

It's an interesting point, what rate is the govt borrowing at ? If inflation is at 4% who would lend to them for less than that ?

[Constable]

I don't quite understand the bond market. Why would someone want to lend to the British government at 2% pa? Is it because pension funds etc. consider it better than nothing?

Real interest rates must surely be moving higher. Why would a bank lend at less than the rate of inflation? - it doesn't make sense. I suppose the special liquidity schemes are the reason - if the banks can borrow at next to nothing then I suppose it makes sense. But once again it's the taxpayers who end up taking all the risk and footing the bill.

I hate Mervyn King. He's bailed out the banks and the feckless, protected asset prices for the rich, and now tells the populace to put up and shut up. The tw*t should hang.

[shermanator]

Think they may rise by .25% this year but quickly reversed when it's realised the UK is too weak to even take that. I predicted that Britain would end up in a deflationary death spiral, drowning under debt a la Japan Pre 2007 - nothing that's happened since has forced me to change tack. Unless of course average wages start rising

[leicestersq]

I don't quite understand the bond market. Why would someone want to lend to the British government at 2% pa? Is it because pension funds etc. consider it better than nothing?

Real interest rates must surely be moving higher. Why would a bank lend at less than the rate of inflation? - it doesn't make sense. I suppose the special liquidity schemes are the reason - if the banks can borrow at next to nothing then I suppose it makes sense. But once again it's the taxpayers who end up taking all the risk and footing the bill.

I hate Mervyn King. He's bailed out the banks and the feckless, protected asset prices for the rich, and now tells the populace to put up and shut up. The tw*t should hang.

You need this link.

http://noir.bloomberg.com/apps/quote?ticker=GUKG10:IND

Why anyone would be willing to lend to the UK government at the current 3.71% rate of interest for ten years and all the extra risk that entails is beyond me. But there you are, facts are facts.

[ralphmalph]

I don't quite understand the bond market. Why would someone want to lend to the British government at 2% pa? Is it because pension funds etc. consider it better than nothing?

Real interest rates must surely be moving higher. Why would a bank lend at less than the rate of inflation? - it doesn't make sense. I suppose the special liquidity schemes are the reason - if the banks can borrow at next to nothing then I suppose it makes sense. But once again it's the taxpayers who end up taking all the risk and footing the bill.

I hate Mervyn King. He's bailed out the banks and the feckless, protected asset prices for the rich, and now tells the populace to put up and shut up. The tw*t should hang.

Four reasons why institutions hold gilts really.

The first is that a certain Mr Brown changed 2 rules. Early on in his time as chancellor he changed the pensions rules which meant they had to hold a higher portion of assets in bonds as opposed to equities after the 2000 stock market crash. With custom incompetance, Brown did not wait to implement until after equities had recovered there value so pension funds had to sell equities at the bottom of the market and buy govt bonds. If you wonder why all these UK companies have black holes in their pension funds and most have closed them, this is the number one reason.

The second rule change was when Lehmans went down Lehmans US was taking every last penny from Lehmans UK to the US every night to make the US ops look solvent. So a change was brought in that meant any financial operation here had to keep a capital buffer in the UK and almost the only qualifying asset just happened to be UK gilts and sterling of course.

Third people with personal pensions that are close to retirement will choose to move from equities to gilts just in case of a stock market crash and to also avoid currency risks will hold UK govt debt they may well still hold this govt debt during their retirement for a guaranteed income, stocks that pay dividends can stop paying them whereas bonds can not unless default so during economic bad times the pensioner still gets an income.

Nations that trade with us in sterling or have companies that have a requirement for sterling will hold UK govt debt as it is easily exchanged to sterling when required. We do the same as a country holding US govt debt, etc.

[Strike_One]

I thought that it was received wisdom that US Treasuries were considered a bubble due to the Fed's insistence on holding IR's so low over there (as here). Not if, but when, I recall the likes of Mohamed el Erian of Pimco musing. Wouldn't an overnight lack of confidence force the central bankers' hands?

Surely given the inverse relationship between price and yield some folks - including pension funds etc - are going to lose vast amounts of cash if/when this black swan materialises and prices collapse? Presumably with a great deal of contagion spilling over to other debt assets around the world, eg, gilts, eurozone debt, and of course corporate bonds which have been booming too for the last couple of years.

On a similar vein, wouldn't a collapse in bond prices cause havoc for the planned eventual sterilisation of all the quantitative-easing money? (Not sure if I've got that bit right).

[mfp123]

I don't quite understand the bond market. Why would someone want to lend to the British government at 2% pa? Is it because pension funds etc. consider it better than nothing?

Real interest rates must surely be moving higher. Why would a bank lend at less than the rate of inflation? - it doesn't make sense. I suppose the special liquidity schemes are the reason - if the banks can borrow at next to nothing then I suppose it makes sense. But once again it's the taxpayers who end up taking all the risk and footing the bill.

I hate Mervyn King. He's bailed out the banks and the feckless, protected asset prices for the rich, and now tells the populace to put up and shut up. The tw*t should hang.

to a certain degree, holding government bonds is like you keeping your money at the bank.

when youre talking in the £100million's you dont really want to keep it in a natwest savings account, in case they go bust.

holding bonds is almost like keeping your money liquid. but instead of holding it as cash, you at least get a small interest rate.

at the height of the economic crisis the yield was actually negative on some bonds. i.e people were so scared of losing their money at banks, they were effectively paying interest to hold bonds.

for 10k cash you can leave it in a bank, for £1billion in cash you need the security of bonds.

Edited January 27, 2011 by mfp123

[ralphmalph]

I thought that it was received wisdom that US Treasuries were considered a bubble due to the Fed's insistence on holding IR's so low over there (as here). Not if, but when, I recall the likes of Mohamed el Erian of Pimco musing. Wouldn't an overnight lack of confidence force the central bankers' hands?

Surely given the inverse relationship between price and yield some folks - including pension funds etc - are going to lose vast amounts of cash if/when this black swan materialises and prices collapse? Presumably with a great deal of contagion spilling over to other debt assets around the world, eg, gilts, eurozone debt, and of course corporate bonds which have been booming too for the last couple of years.

On a similar vein, wouldn't a collapse in bond prices cause havoc for the planned eventual sterilisation of all the quantitative-easing money? (Not sure if I've got that bit right).

Bonds pay out the full bond price at maturity so if you pay 1£ for a 5 year bond the govt gives you £1 back in 5 years time. Losses are only taken on bonds if you sell before maturity or default or debt restructuring. Pimco are bond traders so always take what they say with the required pinch of salt. A pension fund will generally buy new issues and hold to maturity so if 1/2 way through the bond is trading at half price they do not really mind (affects other issues though) because they know at maturity they will get 100p in the pound back (and have pocketed the interest over the period.

One thing that does flag a warning sign is what time length of bonds a country can issue. One reason our financial masters are confident that the world does not view the UK as a potential defaulter is because the UK has been issuing 10year and above with realitve ease at lowish rates. Whereas if you look at Spain and Potugal all they seem to be able to issue are 6 month or 1 year sovs indicating that investors do not think there money is safe with those countries for longer than that.

[gravity always wins]

One reason our financial masters are confident that the world does not view the UK as a potential defaulter is because the UK has been issuing 10year and above with realitve ease at lowish rates. Whereas if you look at Spain and Potugal all they seem to be able to issue are 6 month or 1 year sovs indicating that investors do not think there money is safe with those countries for longer than that.

Great post I noted on another thread that we have quite a high maturity rate compared to many other countries would that account for the ease of "getting away" 10+yrs.?

[gravity always wins]

What do people think is the point of the 0.5% base rate if even the government can't borrow at that rate?

To preserve the banking system as chris ct pointed out, increasing banks margins. I'm with cct on these derivatives - notional until default.

The govt can always get the BoE to buy its rubbish.

We are fec*ed either way though.

[nohpc]

Think they may rise by .25% this year but quickly reversed when it's realised the UK is too weak to even take that. I predicted that Britain would end up in a deflationary death spiral, drowning under debt a la Japan Pre 2007 - nothing that's happened since has forced me to change tack. Unless of course average wages start rising

err the inflationary spiral we are now in coupled with western countries determination to keep rates low and print money to infinity should have changed your mind by now.

The currency race to the bottom is not over yet. Apart from Iceland nobody has even defaulted yet.

I can't see deflation happening. We are not in the frugle fifties where families might cut back and use leftovers and make do with old TVs. People see material unnecessary things as their god given right now.

[moneyscam]

To preserve the banking system as chris ct pointed out, increasing banks margins. I'm with cct on these derivatives - notional until default.

The govt can always get the BoE to buy its rubbish.

We are fec*ed either way though.

How does notional become nominal on an interest rate swap when they only exchange cashflows?

[Optobear]

Great post I noted on another thread that we have quite a high maturity rate compared to many other countries would that account for the ease of "getting away" 10+yrs.?

Yes that is true, but the government aren't benefitting from the 0,5% rate at the moment,

my thought is that the only beneficiaries of the 0.5% are the banks and it allows them to make ridiculously large profits, which in turns offsets their losses and allows them to boost their regulatory capital. So the point of the low rate is to provide a way to transfer money from government to banks without the public realising.

If that is right, then the government only need to do that until the banks are re-established with cash, (like filling a petrol tank to full), and then the government can stop the pump (and raise rates back to historical 4-6% levels).

My hypothesis is that the UK rates will just follow the US rates, so it is a question of when the FED feel they've pumped sufficient government money into the US banks to fill them with enough money to be credible - then rates will pop up almost immediately. When that happens the UK will need to do the same.

I'd sugggest that the banks in the US that need that support aren't the big ones (the GS and JPM types), more the local banks and national savings banks. So how bad are those banks, and quickly can they turn off the pump?

[exiges]

my thought is that the only beneficiaries of the 0.5% are the banks and it allows them to make ridiculously large profits, which in turns offsets their losses and allows them to boost their regulatory capital. So the point of the low rate is to provide a way to transfer money from government to banks without the public realising. savers to banks without the public being able to do anything

But yes, banks are recapitalising at a huge rate.. but they do have SLS to pay back. As you say, once their coffers are full (are they ever "full"?) you can see them raising rates to borrowers.

Edited January 28, 2011 by exiges

[gf3]

But yes, banks are recapitalising at a huge rate.. but they do have SLS to pay back. As you say, once their coffers are full (are they ever "full"?) you can see them raising rates to borrowers.

If my ZOPA returns are anything to go by half their interest returns are going on bad debt.

I don't think base rates will go up until HPC is over they will use interest rates to keep house prices steady

Edited January 28, 2011 by gf3

[Optobear]

If my ZOPA returns are anything to go by half their interest returns are going on bad debt.

I don't think base rates will go up until HPC is over they will use interest rates to keep house prices steady

The point is "who is they"? It is the FED (my suggestion), in which case why do they care if they raise rates in the US to suit the US economy and a side-effect is the destruction of UK housing values? I think that will be the trigger - not rising UK rates (which will be just a correlation) but rising US rates.