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Two Year T-bill And Swap Rates Rising

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Times: UK mortgage rate soars to eight-year high

I heard an interesting take on this today.

As you all know, since April the Bank of England has offered the SLuSh Scheme, swapping banks' mortgages, RMBS and ABS for 9m T-Bills. The idea is that the participating banks then repo these T-Bills for cash. The purpose is to provide funding for the overhang of mortgage lending made after the RMBS markets effectively closed in July/August to the end of 2007 (i.e. allowing for 4 to 5 months of committed pipeline production) and allow for refinancing of RMBS coming due.

Here's the rub. The market in T-Bills is just not big enough to absorb the new supply. Further, the DMO wasn't even issuing 9m T-Bills until April this year. The result is a distortion in the money markets with discount rates out to the end of the SLS Scheme period being pushed up.

So while the banks' immediate funding problems were mitigated, the unintended consequence of the extra T-Bill supply is that short-term money market rates are rising. The short-term swap rates banks use to fix mortgage rates are driven by these money market rates.

So the Bank of England is driving up mortgage rates whether or not it moves Bank Rate.

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Here's the rub. The market in T-Bills is just not big enough to absorb the new supply. Further, the DMO wasn't even issuing 9m T-Bills until April this year. The result is a distortion in the money markets with discount rates out to the end of the SLS Scheme period being pushed up.

Sorry to ask a bit of a "Money Markets for Dummies" question, but can you expand on this a tad for those of us who're not all that clear on the mechanics at work here?

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Guest Shedfish

this is why i come here :rolleyes:

every now and then someone comes along and posts something that means a late night, and enough research for a mild headache

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Sorry to ask a bit of a "Money Markets for Dummies" question, but can you expand on this a tad for those of us who're not all that clear on the mechanics at work here?

T-Bills are a discount instrument. I buy one for £95 today and the gummint will pay me £100 in, say 9 months time. So I earn £5 over 9 months.

So if the price goes down because of an oversupply, and I still get £100 when the bill comes due I get a higher rate of return. Price and yield move in opposite directions.

Hence, if the BOE is flooding the market with T-Bills the yield will have to rise.

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T-Bills are a discount instrument. I buy one for £95 today and the gummint will pay me £100 in, say 9 months time. So I earn £5 over 9 months.

So if the price goes down because of an oversupply, and I still get £100 when the bill comes due I get a higher rate of return. Price and yield move in opposite directions.

Hence, if the BOE is flooding the market with T-Bills the yield will have to rise.

At a guess and regardless of banks lack of willingness/ability to lend to each other, since the FED's "assistance" this is why American fixed mortgage rates have never come down. Silly sods.

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At a guess and regardless of banks lack of willingness/ability to lend to each other, since the FED's "assistance" this is why American fixed mortgage rates have never come down. Silly sods.

Both Fannie and Freddie took a hammering on the stock market today after Fannie issued at much higher than expected yields.

Wherever you look it is becoming more and more obvious that the central banks are working to the wrong model and don't have a scooby how to deal with the emerging catastrophe. As far as I can tell, the central banks are in total denial that any of this has anything to do their rediculous monetary policies over the last decade.

The Dutch refer to people having to "sit on their blisters" (a cycling analogy I believe) meaning they have to live with the consequences of their actions. This would appear to be something Merv, Ben and co seem totally unable to recognise.

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Both Fannie and Freddie took a hammering on the stock market today after Fannie issued at much higher than expected yields.

Wherever you look it is becoming more and more obvious that the central banks are working to the wrong model and don't have a scooby how to deal with the emerging catastrophe. As far as I can tell, the central banks are in total denial that any of this has anything to do their rediculous monetary policies over the last decade.

The Dutch refer to people having to "sit on their blisters" (a cycling analogy I believe) meaning they have to live with the consequences of their actions. This would appear to be something Merv, Ben and co seem totally unable to recognise.

Well, obviously.

Being a central banker is generally a "get out of reality free" card. The model they have is that they privatise the profits, socialise the losses, talk in riddles and protect their cronies on wall street et al.

This is too big for them to do that. Way, way, waaaay too big and it's getting bigger every second.

I also think that the original creators of the central bank model ( the mandrake mechanism) failed to understand the exponential function or if they did figured they'd all be dead by the time it's inevitable hyperinflationary outcome rolled around and forgot to mention it to their succesors.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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