Wednesday, August 14, 2013

Sibly fantastic

Mortgage rates could rise as market defies Mark Carney

Bank Governor Mark Carney indicated rates would remain low till 2016 but the markets are pricing in an earlier increase, with implications for borrowers. The rates at which banks lend to one another - usually a key indicator of the future direction of fixed rate mortgage rates - have been rising in recent weeks, in spite of Bank Governor Mark Carney's clear "guidance" that the Bank would cap rates until 2016. The interbank rates reflect the demand for and cost of money changing hands between large institutions. These are rising, suggesting market participants are not convinced by Mark Carney's commitment made on August 7 to keep rates low until certain economic conditions - notably unemployment targets - were met. Five year swap rates have risen by a greater 21pc.

Posted by khards @ 07:41 PM (2564 views)
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15 thoughts on “Sibly fantastic

  • 10yr gilts up to 2.64%

    The market do not believe this Carney boy and have taken his bluster and confusing statement as signs that he is out of bullets.

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  • Why else employ a ‘foreigner’ as governor unless you want someone to setup as a fall-guy.

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  • stillthinking says:

    Does the pound need to devalue? If you think so, then probably you are looking for higher interest rates.

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  • not only are gilts up, short sterling futures are also pricing in earlier hikes

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  • Two-year swap rates have risen by 16pc in the fortnight since July 30 from 0.68pc to 0.79pc. Five year swap rates have risen by a greater 21pc from 1.37pc to 1.66pc.

    So 11 basis and 29 basis respectively. Basically these are nothing moves. To put this in perspective in Feb 11, 3 month sterling was indicating a rate of 1.6%, in feb of this year 0.4%, late June 0.65% and since 30th July its up 4bps! These are all the moves on the Sep13 contract,

    For March 2015 the markets have 1%, but this differential is about normal, and doesnt necessarily believe the market thinks IRs will move higher. . although here we have moved 30 basis off the top (i.e. the market has priced rates increasing by 0.3% ). If Sep 2013 breaks below 9930 – i.e. 0.7% then there would be some excitement and possible divergence from BoE guidance.

    However that is all a bit academic – as Libertas says its the long end thats important. Now the elasticity of demand for money at rates which are not at real rates of interest, coupled with lacklustre wage inflation…. surely thats a more interesting debate?

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  • mark wadsworth says:

    There’s a good site called fixed income invesetor which has a chart on its front page showing ten year gilt interest rates.

    Up from 1.6% to 2.6% in four months. Of course, this might be a blip, or “nothing moves” to use the Technie-cal term, and maybe we’re clutching at straws, but when straws is all you’ve got, then you clutch at them.

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  • mark wadsworth says:

    Or to be less dramatic, ten year rates are up from ridiculously low 1.4% a year ago to still stupid low 2.6% now, if they keep chugging up at 1% a year, then in two years we’ll be back to “normal”.

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  • Mark, I wasn’t saying moves in the LONG end aren’t important, they obviously are. Of course although we have had some decent increase in yields (% gains are a bit pointless to my mind, but the recent basis point moves are a better indicator), the real key is the market reaction after the inevitable bounce. i.e. is this move from the highs (prices) the reversal of the bull or is it just a dip.

    The market reaction after the bounce should help determine this. I think we pretty much know where you and I stand on this one, but counting chickens has been the downfall of many a formerly astute market participant!

    Of course a move from 132 to 110 or 2200 bps IS impressive, and the chart looks sh1tty but we have to get rid of some bearish sentiment before we can have a sustained bear.

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  • mark wadsworth says:

    “but we have to get rid of some bearish sentiment before we can have a sustained bear”

    You’ve lost me now.

    As I said, all I’ve got left is chickens and that is all I can count, in between clutching at straws while crossing my fingers. Maybe this is a blip and ten year rates will be down at 1.4% again in a few months, what do I know? Or maybe it will be like 1993-94 and rates will go up 3% in a year (although at that time, the BoE and Fed were not doing everything within their power to keep rates stupid low)

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  • mw, techie

    I only researched all that employment/house price stuff a few years back, because my interest rate/house price stuff didn’t produce anything worthwhile.

    Just like with the unemployment stuff, I went back several decades and five separate markets but found no consistent link between rising interest rates and falling house prices. In the past house prices have risen in times of falling interest rates and they have risen in times of rising of interest rates. They have also fallen in times of falling interest rates and fallen in times of rising interest rates. The rises versus fall cases were so close to 50:50 that nothing meaningful could be derived from it.

    I can make a guess why that might be…I think that interest rates often rise because the economy is growing strongly and in a scenario like that it’s not hard to imagine house prices continuing to rise. The problem is that I ‘guessed’ that there would be a strong relationship between interest rates and house prices when there wasn’t and I ‘guessed’ that the relationship between unemployment and house prices would be inconclusive when it was anything but. I guess that’s why guesses suck and data analysis doesn’t

    The point that I’m making is that there seems to be a consensus assumption that house prices will fall if interest rates rise significantly. The data suggests that there’s only a 50:50 chance of that happening.

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  • mark wadsworth says:

    Flash, yes, you have shown that on the basis of historical data there is little link, I’m convinced anyway, that is because it is nigh impossible to control for all the various factors, i.e.

    1) high interest rates might mean people fear general price inflation, in which case they are stampeded into “investing in bricks and mortar”, so both go up in tandem.

    2) high interest rates might mean the economy is doing well with good returns on actual capital, and if the economy does well, then house prices will also go up, so both go up in tandem.

    3) and also, in the past, interest rates were not quite as artificially depressed as they are now, they were market rates, what we have now is not market rates, it’s whatever the government wants them to be (Funding for Lending and to a much lesser extent Help To Sell).

    4) and there’s all the “restricted supply/flood of immigrants” nonsense going on as well which must cloud the picture.

    5) As we also know, it’s not interest rates so much which matter but “the ease with which you can get credit” and while there is a wealth of statistics on bank base rate, SVRs and so on, I’m not even sure how you measure “reckless lending”.

    If the banks say “We’ll give anybody a mortgage for as much money as he wants, no deposit, no proof of income required and no questions asked, we won;t even bother with sending a valuer round, interest rate 6%” then that will inflate prices much more than if the banks are hyper cautious with large deposits, low salary multiples, good credit record and strict valuations and lend at 3%. And in the former scenario, as long as prices are kick started to rise more than 6% a year, there will be a bubble.

    6) So really, the only significance of interest rates is to indicate that credit is tight (and there are plenty of scenarios where this is not the case, rates might be high because of LOOSE credit criteria rather than TIGHT credit i.e. payday loans)

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  • mark wadsworth says:

    … but finally

    7) Interest rates AT PRESENT are only low because of mad cap mortgage credit subsidies, i.e. banks can borrow for under 2% AS LONG AS they splash the money out of the door as new loans to home buyers.

    We know that after FLS was introduced, mortgage rates went down 1% or 2% very rapidly as a result. And the whole intention is to keep stoking the house price bubble.

    If they took away that FLS crutch, things would look completely different, prices would almost certainly be falling – tighter credit AND higher interest rates.

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  • Flash… in short it looks like MW is saying the current circumstances differ from those where the unemployment numbers rule. I think we all remember the 2.75m number – sort of etched on the memory.

    In any case that is what is interesting. The article points to the short end and it not being controlled by the BoE the point made looks contrived to me. I was just trying to illustrate that and Mark rightly pointed out that there has been quite large moves in the Long end.

    “I think we pretty much know where you and I stand on this one” was actually referring to further tightening at the long end, but for my money only after some brave bears have had their b0ll0cks handed to them on a plate.

    I sort of alluded to forward guidance on QE the other day and i see that Khards has posted an article above that if the market doesnt play ball, then the BoE will pump up the QE volume. Carney looks like a bit of a wimp to me (in the physical sense), so its about time he sees how muscle flexing is taken on by the boyz.

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  • mark wadsworth says:

    “there have been quite large moves in the Long end.”

    that’s what it looks like to me. 10 year Gilt future touched 109.1 today, which is a darn’ sight less than where it was for the first half of the year 117 – 120 range.

    And even if interest rates have NO effect on house prices, I personally would vastly prefer interest rates to be a lot higher and for inflation to be a lot lower, I would happily rent for the rest of my life if this were the case.

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  • mw, techie, I wouldn’t take issue with anything written in the above three posts. Every ounce of my natural brain tells me that higher interest rates will hurt house prices. After all there was no situation quite like (as per mw above) this in the dataset I looked at. However long (and sometimes painful) experience tells me to be cautious. In techie’s game, logic often bankrupts you because the damn thing doesn’t turn when it’s supposed to and vice versa.

    For what it’s worth, I never really thought that the long end was being influenced that much by QE and the short end. To me it was always the flight to safety that allowed such a low coupon to be paid. The flight to safety mentality is now expiring, so they can’t get away with such low coupons for much longer. Carney and crew can forward indicate, guide and QE all they want. I don’t think it’ll ultimately have that much effect. Do you remember the days when the BOE used to put up interest rates to counteract inflation caused by global demand for commodities? They were completely impotent and I don’t see them being any more potent in this attempt (as per techie’s inference in his last sentence)

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