Sunday, November 1, 2009

Mortgage Rates Up?

National Savings bond set to spark rate war

National Savings has launched a one-year fixed-rate savings bond paying a table-topping 3.95%, which is likely to prompt a pre-Christmas rate war.....Surely this will mean borrowers will see rates rise?

Posted by magnaman @ 01:27 PM (1990 views)
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9 thoughts on “Mortgage Rates Up?

  • As NS & I is the government’s savings body, the expression “hoist with their own petard” comes to mind.

    Surely this contradicts the BOE / Government policy of nailing IR’s to the floor, as the article says, it is likely to prompt a pre Christmas rates war.

    Could this result in people saving rather than spending and borrowers seeing rates rise thereby finally sinking the loony in number 10?

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  • Lets hope so!!

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  • How puzzling. Anyone care to make a stab at an explanation for this?

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  • This tells me that the govt is predicting interest rates to be higher than they are now in a years time. If they are encouraging people to lend to them for a year at just under 4%, then they must think its going to cost more than that fairly soon.

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  • mark wadsworth says:

    What Goweresque says.

    I have no reason to assume that NS&I pay anything other than market interest rates – they have to, as they borrow huge sums of money.

    Rather surprisingly, the current gilt yield curve starts at 0.5% for short term; for one year to maturity it looks like about 1.0% and rises to slightly over 4% for five years or more (being pretty flat for longer than five years).

    So the government/NS&I must be expecting rates to rise quite sharply. Whether they will do so is another topic, but that is one heck of a mismatch.

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  • fallingbuzzard says:

    It doesn’t surprise me that short term yields are low. All the commercial banks are switching deposits at the Bank of England into shorter dated gilts because they fear the central bank will follow the Swedish example and introduce zero or negative rates on deposts in an attempt to encourage lending to the wider economy. More fool the BoE. This has depressed the yield. The banks, as usual, are one step ahead of the BOE.

    The government doesn’t want to lose part of an important source of funding NS&I now. Theres £100bn in there. Lose 20% of it and you need to issue £20bn more gov bonds next year. Yields on newly issued government debt are mostly in the range 2.5% to 3.5% so you can afford to offer 4% through NS&I, which is far less when you get back the basic or higher rate tax.

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  • fallingbuzzard: I thought these NS&I bonds were tax free?

    goweresque and mark: doesn’t this just send a signal to the rest of the market that the government expects bond rates to rise even faster than the market already does? This is what puzzles me. Why would they do that?

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  • fallingbuzzard says:

    No, those ones are not tax free, they’re net. The tax free ones have crummy interest rates, designed to con pensioners of their savings (oops, did I say that). After all, the average rate savers get on NS&I across all products is 1.3%.

    Its not addressed to me, but the 3.95% bond doesn’t send that signal out. It does tell me that the main banks and building societies are being uncompetitive.

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  • mark wadsworth says:

    d’oh, yes, it does send very confused signals indeed. I’m as puzzled as you are.

    PS, some NSI is tax free but they pay low rates; other interest is paid out gross but you have to pay the tax yourself at the end of the year (if any is due).

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