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Bonds Rates And Boe Interest Rates?

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Bond rates can be seen here.

http://markets.ft.co...h/Markets/Bonds

All I know is that if the 10 year bond rate increases, it can affect the BoE base rate. Anyone know what bond rate value would do this? This is relevant as bond rates are moving up, and the BoE base rate directly affects house prices.

I think the Masked Tulip posted something about this the other day? There was a guy on Bloomberg recently talking about certain "trigger points" and effects on the stock market, but I was looking at the interviewers tits or something and didn`t take it all in, we are probably in uncharted financial regions today anyway so they are all just guessing? Anything that forces the UK PTB to stop meddling with market forces would be welcome IMO.

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Bond rates can be seen here.

http://markets.ft.com/research/Markets/Bonds

All I know is that if the 10 year bond rate increases, it can affect the BoE base rate. Anyone know what bond rate value would do this? This is relevant as bond rates are moving up, and the BoE base rate directly affects house prices.

Not sure I follow your cause and effect. You state that it can affect the base rate, so presumably it can not. Bond rates have moved up, although you would not be able to tell from this link - it shows the 10-yr gilt falling over the past month. However, over the past few months it has risen. If anything, it is an indicator rather than a directeffect.

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Bond rates can be seen here.

http://markets.ft.co...h/Markets/Bonds

All I know is that if the 10 year bond rate increases, it can affect the BoE base rate. Anyone know what bond rate value would do this? This is relevant as bond rates are moving up, and the BoE base rate directly affects house prices.

The Taylor Rule can be used to suggest where base rates 'should' be. Paul Volcker used the rule informally to bring the US economy back from the brink in the early 80s.

Short term rates = GDP deflator + expected inflation + 0.5 (current inflation - target inflation) + 0.5 (output gap)

Plug in some ONS numbers. i.e. GDP deflator 1.7, target inflation 2.0, current inflation 2.9, expected inflation 2.8 and output gap -2.5 (ONS estimate)

Result = 3.7%

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Bond rates can be seen here.

http://markets.ft.com/research/Markets/Bonds

All I know is that if the 10 year bond rate increases, it can affect the BoE base rate. Anyone know what bond rate value would do this? This is relevant as bond rates are moving up, and the BoE base rate directly affects house prices.

No. The 10-year bond rate cannot influence the base rate, as the base rate is a policy rate set by the MPC. In normal times, bond rates go up as inflation sets in, so the MPC would be unlikely to leave the base rate low, for fear of inflation. In our weird times, inflation is being coupled with low bond rates, partly because of QE. Now QE is halted, it gets more interesting.

Even if the base rate remains stable at 0.5%, the rise in the bond rate can influence money market rates that feed into mortgage rates, as banks' cost of funding are affected - I think the base rate is just overnight money they can borrow from the BoE, and banks that rely on wholesale markets for funding cannot purely rely on the base rate and so are affected by the bond rate.

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The Taylor Rule can be used to suggest where base rates 'should' be. Paul Volcker used the rule informally to bring the US economy back from the brink in the early 80s.

Short term rates = GDP deflator + expected inflation + 0.5 (current inflation - target inflation) + 0.5 (output gap)

Plug in some ONS numbers. i.e. GDP deflator 1.7, target inflation 2.0, current inflation 2.9, expected inflation 2.8 and output gap -2.5 (ONS estimate)

Result = 3.7%

Would you care to rework your maths?

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The Taylor Rule can be used to suggest where base rates 'should' be. Paul Volcker used the rule informally to bring the US economy back from the brink in the early 80s.

Short term rates = GDP deflator + expected inflation + 0.5 (current inflation - target inflation) + 0.5 (output gap)

Plug in some ONS numbers. i.e. GDP deflator 1.7, target inflation 2.0, current inflation 2.9, expected inflation 2.8 and output gap -2.5 (ONS estimate)

Result = 3.7%

But banks can borrow at 0.25% from the BoE so long as they re-lend it to mortgage customers. This surely trumps any calculation based on economic fundamentals in the short term. As far as mortgages go, they are 0.25% plus the lender's profit margin. And I think the FLS has been extended and can be extended ad infinitum.

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If yields rise, the cost to borrow rises, so the base rate rises,

Why

Well the govt needs to borrow money the interest becomes too high, then the gov defaults.

Once something like that happens, money comes in very short supply. Asset prices plummet as banks grab cash from anywhere they can.

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If yields rise, the cost to borrow rises, so the base rate rises,

Why

Well the govt needs to borrow money the interest becomes too high, then the gov defaults.

Once something like that happens, money comes in very short supply. Asset prices plummet as banks grab cash from anywhere they can.

~Federico, you're right. ~What you seem to be saying is that the government will only raise base rates if they need to do so to restrain inflation in order to prevent higher bond yields from pushing up government debt-servicing costs. ~So this all depends on inflation.If inflation remains low, they can get away with it.

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~Federico, you're right. ~What you seem to be saying is that the government will only raise base rates if they need to do so to restrain inflation in order to prevent higher bond yields from pushing up government debt-servicing costs. ~So this all depends on inflation.If inflation remains low, they can get away with it.

Inflation in what though, food, energy, housing.

Wages certainly cannot inflate without some fantastic business model on a massive scale.

So real people in the real world are getting worse off every day.

The gov is borrowing more every day,

As I understand it, the banks give money to the boe, deposits, safe money to be held in reserve and lent to other banks as required during settlements.

The situation I allude to is reserves drying up.

Again, I could be wrong but.. The banks borrow money to lend to people at a high rate, often they are caught short and need to step into boe reserves, charged at 0.5%.

If the subsidised reserves start to dry up, rates rise across the board.

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My understanding was that the base rate is largely irrelevant now as mortgage rates have been increasing despite the base rate remaining constant.

I think Libor (or equivalent) was a larger influencer.

Happy to be corrected.

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But banks can borrow at 0.25% from the BoE so long as they re-lend it to mortgage customers. This surely trumps any calculation based on economic fundamentals in the short term. As far as mortgages go, they are 0.25% plus the lender's profit margin. And I think the FLS has been extended and can be extended ad infinitum.

No they can't. You do not appear to understand how FLS works.

The effective funding rate is about 1%.

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The Taylor Rule can be used to suggest where base rates 'should' be. Paul Volcker used the rule informally to bring the US economy back from the brink in the early 80s.

Short term rates = GDP deflator + expected inflation + 0.5 (current inflation - target inflation) + 0.5 (output gap)

Plug in some ONS numbers. i.e. GDP deflator 1.7, target inflation 2.0, current inflation 2.9, expected inflation 2.8 and output gap -2.5 (ONS estimate)

Result = 3.7%

>Overide authorisation code Carney Zeta Alpha

>Override confirmed. The rate is now 0.5%.

:rolleyes:

Edited by easy2012

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But banks can borrow at 0.25% from the BoE so long as they re-lend it to mortgage customers. This surely trumps any calculation based on economic fundamentals in the short term. As far as mortgages go, they are 0.25% plus the lender's profit margin. And I think the FLS has been extended and can be extended ad infinitum.

To new customers. Existing stiffs get the SVR or a two year fix if they've got enough equity. FLS is a four year collateral swap. After 4 years they get the crap back. There's nothing in FLS that compels banks to lend more, and no reason to expect them to. They're using it to roll over their relatively expensive unsecured debt at a lower rate of interest. Help To Buy is a different matter where the taxpayer is exposed to a genuine risk of loss a la Fannie and Freddie. This alone should limit its availability.

The Taylor Rule is just a rule of thumb, I wouldn't put too much store by it. It was well-matched to the trajectory of interest rates in the 80s, but much less so thereafter because of the role played by private debt in the global economy.

.

Edited by zugzwang

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Inflation in what though, food, energy, housing.

Wages certainly cannot inflate without some fantastic business model on a massive scale.

So real people in the real world are getting worse off every day.

The gov is borrowing more every day,

As I understand it, the banks give money to the boe, deposits, safe money to be held in reserve and lent to other banks as required during settlements.

The situation I allude to is reserves drying up.

Again, I could be wrong but.. The banks borrow money to lend to people at a high rate, often they are caught short and need to step into boe reserves, charged at 0.5%.

If the subsidised reserves start to dry up, rates rise across the board.

Federico, you don't quite understand. The Base rate is a policy rate - it is set by the BoE - they can set it at what they like. It is not forced up by anything. Banks running out of money would not force the rate up (but might persuade the BoE not to raise it).

The only situation where they might be forced to raise it is if they felt an increase would help to ward off inflation, and thus persuade bond market participants to keep bond yields low, allowing the government to finance itself cheaply. This stuff about banks running out of money is frankly nonsense. They are not lending the money they do have.

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But banks can borrow at 0.25% from the BoE so long as they re-lend it to mortgage customers. This surely trumps any calculation based on economic fundamentals in the short term. As far as mortgages go, they are 0.25% plus the lender's profit margin. And I think the FLS has been extended and can be extended ad infinitum.

FLS is a four year collateral swap. After 4 years they get the crap back.

H/T FreeTrader:

Just to clarify a common misconception about the Funding for Lending Scheme (FLS):

The FLS doesn't allow lenders to fund loans at 0.25%.

I'll say that again:

The FLS doesn't allow lenders to fund loans at 0.25%.

Bank funding costs have been elevated because there is doubt in the market regarding the quality of the collateral they can offer in exchange for funding.

The FLS allows banks to swap this 'uncertain' collateral for Treasury Bills (it's not a 1:1 swap – they take a haircut in the process). For this they pay the BoE a fee (0.25% to 1.5% p.a. depending on their net lending levels).

The banks can then go to the wholesale markets and offer the much higher quality Treasury Bills as collateral, enabling them to borrow very cheaply - at somewhere close to Bank Rate (0.5%).

Assuming a bank maintains or increases its net lending, the funding cost is therefore currently c. 0.75% (0.25% + 0.5%), not 0.25%. Furthermore, if Bank Rate increases then the funding cost will likely rise even if the lowest FLS borrowing fee remains at 0.25%.

It may seem a minor distinction in terms of the resultant funding rate, but it's an important one technically.

Source: FreeTrader, of course!

What odds would you give on the Fed having tapered by 2018? FLS hasn't yet been extended beyond 2014, and unless it is, in 2018 the banks will be having to pledge their crap collateral as collateral. Will they be able to fund their balance sheet at a whisker about the policy rate + a moderate fee, or will they have to pay a rate that reflects that they are offering self-certified interest only mortgage secured on overpriced crap houses owned by people on a zero-hours contract who are eating horse lasagne?

And what happens to mortgage rates if that change comes?

Edited by ChairmanOfTheBored

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H/T FreeTrader:

Source: FreeTrader, of course!

What odds would you give on the Fed having tapered by 2018? FLS hasn't yet been extended beyond 2014, and unless it is, in 2018 the banks will be having to pledge their crap collateral as collateral. Will they be able to fund their balance sheet at a whisker about the policy rate + a moderate fee, or will they have to pay a rate that reflects that they are offering self-certified interest only mortgage secured on overpriced crap houses owned by people on a zero-hours contract who are eating horse lasagne?

And what happens to mortgage rages if that change comes?

UK PLC summed up nicely :lol: You forgot to add "and watching all the Corrie/Emmerdale catch ups"

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H/T FreeTrader:

Source: FreeTrader, of course!

I don't believe FLS has contributed a great deal to UK HPI. The banks have profited from the swap arrangements, naturally, but there certainly wasn't much evidence of an uptick in mortgage lending prior to the announcement of Help to Buy in April.

In order of significance then:

1. Govt deficits

2. QE/ZIRP

3. Foreign buyers/capital flight

4. Help To Buy

5. Funding for Lending

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will be having to pledge their crap collateral as collateral. Will they be able to fund their balance sheet at a whisker about the policy rate + a moderate fee.

Yes they can.

The catch is that without FLS, those interbank loans are likely to be overnight, 7 days or max 3 months and the banks are vulnerable to liquidity crunch that will send the rates through the roof (like China recently) in theory.

In practise, I suspect a call to BoE would solve the problem, if they know how to maintain a good relationship with BoE ( something Bob Diamond could learn from).

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I don't believe FLS has contributed a great deal to UK HPI. The banks have profited from the swap arrangements, naturally, but there certainly wasn't much evidence of an uptick in mortgage lending prior to the announcement of Help to Buy in April.

In order of significance then:

1. Govt deficits

2. QE/ZIRP by ECB, FEB and BoE

3. Foreign buyers/capital flight

4. Help To Buy

5. Funding for Lending

Corrected. BoE couldn't have single handedly delivered the effect seen here.

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H/T FreeTrader:

Source: FreeTrader, of course!

What odds would you give on the Fed having tapered by 2018? FLS hasn't yet been extended beyond 2014, and unless it is, in 2018 the banks will be having to pledge their crap collateral as collateral. Will they be able to fund their balance sheet at a whisker about the policy rate + a moderate fee, or will they have to pay a rate that reflects that they are offering self-certified interest only mortgage secured on overpriced crap houses owned by people on a zero-hours contract who are eating horse lasagne?

And what happens to mortgage rates if that change comes?

100% guaranteed! Actually, I think Benny will taper before the end of 2013, even though recovery seems as distant as ever. The Fed SOMA account is up 27% y-o-y, while stocks are +22% and house prices +13.5%. Those are bubble metrics. There simply isn't enough paper around to absorb the cash that's being continuously created every month. Just 48% of Americans now hold full time jobs, same as the recession in 1982. Obamacare to blame? A little, perhaps. But truthfully the Fed is blowing massive asset bubbles while the real economy plods along. QE infinity is an inflationary menace.

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Yes they can.

The catch is that without FLS, those interbank loans are likely to be overnight, 7 days or max 3 months and the banks are vulnerable to liquidity crunch that will send the rates through the roof (like China recently) in theory.

i.e. until they can't, which was my point.

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