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Scott

Swap Rates

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Smell the Fear put forward a post about swap rates (great post in my opinion - http://www.housepricecrash.co.uk/forum/ind...howtopic=49074). In that post, he included a link to a web page that showed swap rates (it's now 'added to my favourites', thanks SmelltheFear!).

Now if I'm correct, swap rates are the rates that the lenders borrow at, when they go to the money markets?! Please correct me if I'm wrong on this, fellow HPC'ers.

Anyway, my question is this, what is the graph actually showing? Is it showing what the swap rates are for the current fixed rate periods?

Am I right in thinking that lenders borrow a large pot of money from the money markets and then base their products on that until the pot runs dry. So, for example if a lender has used all their pot of money for their fixed rates, do they borrow money for their new fixed rates at the present swap rate?

My thinking is that the main triggers for a HPC are sentiment, interest rates, inflation and money supply (all inter-related). I believe that an interest rate of 6% will be the breaking point so find the swap rates to be quite key in the future tea leaf readings (if indeed they are what I think they are)!

Of course, the lenders seem to be great at upping the fees to keep their rates low which keeps spurring on HPI. But ultimately it will get to (if not already) a crunch point where they can't keep doing this. £6k+ application fee on a 6% fix when BoE rates are 7% will not sell very well I wouldn't have thought. :huh:

So, if someone can confirm my thinking on what swap rates are and also confirm if the graph shows if they are for the moment and is what the lenders borrow, that would be great.

PS I'm not after anyone de-bunking my theory of sentiment, interest rates, inflation or money supply!!! I know we all have our own theories on what the trigger will be (or not if you are a bull). ;)

Let's keep the replies purely on swap rates please.

And apologies if this has been asked before, I'm still fairly new to this site!

Thanks

Scott

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Yes, you're right about swap rates.

With regards to the pot of money you talk of, banks may just up the rate before the pot runs dry if they feel they can get away with it. Obviously, this just means they make more profit.

The other thing about swap rates is they will always be higher than the short term BoE rate as they include a bad debt premium, usually 15-20base points higher (0.15 - 0.20% higher). So, you need to adjust for this to see the predictive nature of swap rates.

In the next few weeks you'll see lots of fixed rates shooting up again... Ho hum.

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Now if I'm correct, swap rates are the rates that the lenders borrow at, when they go to the money markets?! Please correct me if I'm wrong on this, fellow HPC'ers.

Even if they have secured cheaper funding they will still put up rates on consumer products and just pocket a greater spread.

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Yes, you're right about swap rates.

With regards to the pot of money you talk of, banks may just up the rate before the pot runs dry if they feel they can get away with it. Obviously, this just means they make more profit.

The other thing about swap rates is they will always be higher than the short term BoE rate as they include a bad debt premium, usually 15-20base points higher (0.15 - 0.20% higher). So, you need to adjust for this to see the predictive nature of swap rates.

In the next few weeks you'll see lots of fixed rates shooting up again... Ho hum.

Cheers Jason, looks like interesting times ahead then.

I'm an ex-South Easterner (Gravesend) now in Weston. I notice prices in the South East are still stupid. Must be, as a place in Northfleet (s***hole) is listed with Hamptons estate agents (only usually deal with top end of the market!). But it is close to the new Ebbsfleet station!!!

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A swap is an instrument which allows you to exchange floating rates for fixed rates. So say for example that you were a bank and you had lent someone £100 for 5 years. To pay for this loan you have borrowed in the short-term money markets and are therefore paying short-term (floating) rates.

Everything is OK unless short-term rates go up much higher than the fixed rate you lent the money at. This is why banks use swaps. You can swap the short-term rates you are borrowing at against a fixed rate. So say for example you lent the money out at 5%. If short-term rates are now 4% then you are making 1% but this may change and you would like to shield yourself from any unwanted shocks (short-term rates going up). So you go to the swaps market and exchange your short-term payments for a fixed payment. If the swaps market prices 5-year rates at less than 5% you have made a profit.

The swaps market is much bigger than the market for loans and so all prices for debt are priced off the swaps market.

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