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Realistbear

Reuters: Bonds Are Now Threat To House Prices In U K

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http://investing.reuters.co.uk/news/articl...PERTY-RATES.xml

Bond yield spike threatens property boom

Tue Jun 19, 2007 10:26 AM BST18
By Christina Fincher
LONDON (Reuters) - House prices have trebled in the last decade but rising yields in global bond markets may finally bring the party to an end.
So far, house prices have been able to withstand four interest rate rises from the Bank of England partly because of the popularity of fixed-rate mortgages that have allowed borrowers to keep their payments steady.
Surging bond yields and swap rates could change all this, however, as many borrowers who took out cheap two-year deals after the Bank of England cut rates in August 2005 are forced to refinance at much higher rates.
"Fixed-rate deals are typically more than a percentage point higher than there were two years ago," said Drew Wotherspoon at independent mortgage adviser John Charcoal. "Mortgaging to the hilt is not something we would advise."
Bond yields have soared around the world in recent weeks as markets anticipate strong economic growth will force central banks to raise interest rates further than originally expected to curb inflation...../
Higher borrowing costs could also give Britain's growing army of buy-to-let investors -- a record 333,000 mortgages were taken out by landlords last year -- a growing incentive to take their money elsewhere.
:)
But if house prices stop rising -- and forward-looking indicators such as mortgage approvals and new buyer enquiries have been falling -- there could be a stampede for the exit.

Man many months ago I posted an article by Bill Gross the "Bond King." William predicted the genesis of Great Crash 2 in Southern California and his stuff was printed regularly in the Orange County Register which, along with its cousin rag in San Diego, the Union Tribune, were almost lone voices in warning the public that a crash was in the offing (yours truly was active back in 2004-05 in persuading the journos to stop publishing YoY data only and to focus on MoM trends :P ). Perhaps no better barometer exists than the bond market. When the market sees too much risk (quite apart from inflation) it will tighten. The perception of high risk is rife and bonds will probably soar regardless of the inflation news.

Edited by Realistbear

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Perhaps no better barometer exists than the bond market. When the market sees too much risk (quite apart from inflation) it will tighten. The perception of high risk is rife and bonds will probably soar regardless of the inflation news.

You mean you expect bonds to soar, or their yields to soar?

Calling the recent movements a "spike", as in the headline of this article, implies that it's only a temporary disturbance - which I find hard to believe.

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You mean you expect bonds to soar, or their yields to soar?

Calling the recent movements a "spike", as in the headline of this article, implies that it's only a temporary disturbance - which I find hard to believe.

Yes--yields. The great defensive strategy is to make the flight to less speculative investments: bonds.

All of this is in reaction to the speculative excesses of the Brown years. The "Miracles" "BTL mania" "Unlimited MEW" 300% increases in the "value" of houses etc. all eventually end in tears. The bond markets see it happening ahead of sheeple and what we are seeing the bond market doing is simply a reaction to 10 years of financial mis-management. There was never going to be a free lunch.

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My tiny economic brain can't quite compute this in it's entirety but my gut feeling is that this feels solid. But then it could turn out like one of those guffs that feel solid in the gut but then come out rather differently. And that might contribute to global warning. But that's another thread.

So it's good windy bear food all round?

edit:typo

Edited by buylowsellhigh!

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I think we can all thank BTLers for ushering in Great Crash 2:

A survey from the Royal Institute of Chartered Surveyors shows that more than five percent of buy-to-let investors threw in the towel in the first quarter of this year, the highest proportion in two years.

This trickle could turn into a gush in the coming months as the cheap fixed-rate mortgage deals expire.

"A large number of people will be remortgaging in a rising interest rate environment," said a spokesman at the CML. "We expect this will contribute to a slowing housing market."

Let us hope that it is not just a "gush" but a full-on Great Crash 2 style TIDAL WAVE of panic!

Puts a song in your heart doesn't it? "Ohhhhhhh happy days are here again, the skies are blue and......"

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The bond markets see it happening ahead of sheeple and what we are seeing the bond market doing is simply a reaction to 10 years of financial mis-management. There was never going to be a free lunch.

I was interested to read in this Torygraph article about how slow the bond market was to react to economic changes in the 70s and 80s. But then hindsight is a wonderful thing. (Don't know if this was posted already, sorry.)

And in case anyone was in any doubt about why it's happening the way it is:

...when bonds fell last week, the knee-jerk reaction was to say that the markets were now expecting higher inflation. But this idea can easily be dismissed. The market's expected inflation rate can be deduced from the difference in yields on those bonds that offer no protection against inflation (conventionals) and those that do (index-linked). In this case, the yields on conventional and index-linked bonds rose pretty much together. So this was no inflation scare.

In which case, what was it? It was a real interest rate scare. The markets were coming to terms with the idea that real interest rates and real bond yields needed to be higher.

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In this case, the yields on conventional and index-linked bonds rose pretty much together. So this was no inflation scare.

But, uh, when the inflation figures are so totally fiddled, 'index-linked' bonds provide little protection against real-world inflation. So if people have suddenly realised that inflation is much higher than claimed, obviously they'll want a higher return for 'index-linked' bonds as well as normal bonds.

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Guest Charlie The Tramp
This trickle could turn into a gush in the coming months as the cheap fixed-rate mortgage deals expire.

Are there fixed BTL mortgages on IO ? :unsure:

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