Sunday, Feb 01, 2015

10 yr UK debt reaches RECORD LOW YIELD

Uk.investing: UK 10-Year Bond Yield Overview

Yields on 10yr gilts are down from 3% last January to a wafer thin 1.3% now. This total collapse in yields represents reduced inflation expectations combined with increased demand for UK bonds from an increasingly fragile European financial system. Projections that we will have deflation before summer combined with accelerating Euro issues suggest that the prior consolidation of yields will be mirrored to the downside, suggesting that 10yr rates could be close to zero percent within the next couple of years, sending 10yr fixed rate mortgages far lower, with 15 and 25yr fixed rates coming on-line. It also suggests 1, 2, 3 and possibly 5yr rates plunging into negative territory, with mortgage holders being paid negative rates to take out variable rate mortgages.

Posted by libertas @ 08:39 PM (6544 views)
Add Comment
Report Article

19 Comments

1. vinrouge said...

In over 50 years I have never known a bank do anyone a deal for anything that was more beneficial (if at all) to the borower rather than the bank. So where is the catch this time? And why the change of heart?.......Sorry I still don't trust them.

Sunday, February 1, 2015 10:28PM Report Comment
 

2. libertas said...

There is no catch. investors will deposit cash in Sterling because it is a safe haven from the Eurozone and also, in a world of economic woe, our legal system is considered one of the world's safest, i.e. its unlikely the State will confiscate your cash. Regarding returns, it would have been better to deposit cash in Sterling at MINUS 1% than to keep it in Euros at PLUS 1% given how much Euros have depreciated.

Regarding change of heart, it is none of the sort. Banks make cash on the arbitrage between what people are willing to get as a return on deposit vs what borrowers will pay. Competitive forces ensure that interest rates charged on deposit and loan are as competitive as the market will allow.

For example, depositors will put cash into Denmark at MINUS 1.5% on the likelihood that the Danish peg to the Euro will break, causing massive profits. They also see this as an insurance policy against further European woes, because a deeper crisis could make a Danish peg break inevitable. Switzerland proved that currency interventions can have finite legs.

Danish Banks as a result of charging depositors can make arbitrage by paying mortgage holders MINUS 0.01% right now. Why do this? The cash has to be lent out or it will be charged even greater interest charges on deposit at the ECB plus, depositors require that their cash is matched to assets, like houses. Not all bank cash would have to be deposited at the ECB at more negative rates, but some tranches would have to be.

So the economics for paying people to take out mortgages exist in parts of Europe, are actually happening right now, and deflation in the UK plus capital inflows from a deepening Euro crisis could make it happen here. Incidentally, that is likely to occur after the Danish peg breaks, because right now, folk are betting on that more than anything else. Once the peg breaks, profits will be taken in roughly 1 second, after which that cash will seek further safe havens. US Dollars, Swiss Francs, GBP would be good starts.

Remember that the BOE does not control these global capital flows, and so all of their words are just words. They have to react and fight fires, and Carney has indicated that he has the tools and is willing to use them.

Monday, February 2, 2015 07:21AM Report Comment
 

3. libertas said...

Interestingly, it was King Canute, a Dane, who took his court to the beach and instructed the tide to not turn to demonstrate to the Court that he could not turn certain tides. If only Denmark could bring back King Canute's spirit and recognise that they cannot protect a Euro peg against such incompetence, that they will suffer eye watering losses on their Euros once they loose.

Monday, February 2, 2015 07:26AM Report Comment
 

4. quiet guy said...

Maybe, I'm missing the point but the phrase "mortgage holders being paid negative rates" seems to imply that mortgage lenders are going to issue new tracker mortgages without collar restrictions? As I've said before, some lucky people who did obtain such things in the past could benefit but I do not believe anybody will issue trackers without collars now.

Monday, February 2, 2015 07:45AM Report Comment
 

5. khards said...

So how long before pension funds become bankrupt? 12 months?

Monday, February 2, 2015 07:55AM Report Comment
 

6. jack c said...

Khards (Monday, February 2, 2015 07:55AM) interesting question "So how long before pension funds become bankrupt? 12 months?"

My understanding is that pension funds who traditionally buy Bonds have been forced into buying equities as they need yield.

The more I look at look at these type of situations the more convinced I become that we have a disaster in the making ! (time will tell)

Monday, February 2, 2015 10:26AM Report Comment
 

7. debtserf said...

"its unlikely the State will confiscate your cash"

You need to proof-read your swivel-eyed ravings a bit more, although for comedy value they are unsurpassed.

Financial Repression much? Or do savings and pensions not count as cash for the purposes of your theories?

You need to disabuse yourself of the notion that banks will suddenly start paying your mortgage, and that we will have a virtuous economic recovery due to everything turning negative. Negative is not growth, it is the absence of growth.

Banks are more likely to raise interest rates to new borrowers as a result of NIRP.

Monday, February 2, 2015 10:52AM Report Comment
 

8. debtserf said...

"the BOE does not control these global capital flows, and so all of their words are just words. They have to react and fight fires, and Carney has indicated that he has the tools and is willing to use them."

The guvnor is going to whip out his massive monetary vibrator and plunge it into sterling's value? I bet the policy gimps over at the IMF are positively purring in anticipation of this forthcoming fiat debauchery.

Monday, February 2, 2015 11:01AM Report Comment
 

9. icarus said...

@ libertas 07.21AM - "our legal system is considered one of the world's safest, i.e. its unlikely the State will confiscate your cash."

It's not the state we should worry about. It's the banks. Bail-ins involve treating depositors as unsecured creditors, some way down the line of precedence when it comes to getting your money back. How would depositor insurance cope, given that the whole idea of a bail-in is to avoid using taxpayers' money (involving deposit insurance) to obviate a bail-out (that would use taxpayers' money)? Anyway, pension funds and insurance companies hold unsecured bank debt and these creditors hold too much such debt to be covered by depositor insurance. You have money in a pension fund or a brokerage account?...... well, it's on deposit, or being held overnight in a TBTF bank.

Monday, February 2, 2015 02:04PM Report Comment
 

10. cornishman said...

libertas said: "It also suggests 1, 2, 3 and possibly 5yr rates plunging into negative territory, with mortgage holders being paid negative rates to take out variable rate mortgages."

What you haven't explained is why on earth would a bank pay someone to take out a negative rate mortgage for x years?

The bank could just buy shares with the money and get a 2 or 3% positive return (from dividends), which they could ditch at the click of a mouse whenever it suited them - to buy the next hot 'investment'.

Monday, February 2, 2015 07:29PM Report Comment
 

11. libertas said...

Our tracker has a collar stating it will not fall below zero, but given that we have penalties for early repayment, there is no way for them to tie us to that, so it is a rather loose collar if a collar at all.

Monday, February 2, 2015 08:17PM Report Comment
 

12. libertas said...

Cornishman, I have told you why negative rates would be paid. If a bank gets £100 on deposit at minus 5% interest rate (from a foreigner betting Sterling will rise 10%), that cash then sits at the bank. The bank is forced to hold a certain percentage, say, 10% at the Bank of England at their standard rate. If the BOE's interest rate is minus 2%, then the bank can make a profit lending that cash instead to a mortgage holder for minus 1%.

Forget plusses and minuses. These are just abstract things that are distracting you from the reality of arbitrage.

Monday, February 2, 2015 08:20PM Report Comment
 

13. cornishman said...

" then the bank can make a profit lending that cash instead to a mortgage holder for minus 1%."

- or it could make even more profit buying a share paying 3% dividend. So why lend on a mortgage?

Monday, February 2, 2015 09:27PM Report Comment
 

14. quiet guy said...

"Our tracker has a collar stating it will not fall below zero"

Fine. Makes sense so far. So we agree that you will not be paid for taking a mortgage although I would have expected that there is a minimum rate above zero.

"but given that we have penalties for early repayment, there is no way for them to tie us to that, so it is a rather loose collar if a collar at all."

Not sure what that means. Can anybody explain?

Monday, February 2, 2015 09:47PM Report Comment
 

15. cornishman said...

libertas said: "These are just abstract things that are distracting you from the reality..."

Monday, February 2, 2015 10:53PM Report Comment
 

16. Boz said...

Cornishman, deciding on whether to undertake one market activity instead if another is all about perceived risk and reward. If a financial institution can lock in to borrow money from say a central bank at -0.5% and lend that out at -0.25% then arguably this entails less risk than purchasing shares. A 3% dividend is icing on the cake for a share that goes up 20% per year but less useful if the share price has fallen 20%. The negative rate concept seems perplexing but like most things in markets it is simply about the relative levels of which you buy and sell something - in this case an interest rate.

Monday, February 2, 2015 10:56PM Report Comment
 

17. icarus said...

(1) The 000.1% hold nearly all the IOUs and have nearly all the investible funds.

(2) They invest in financial markets looking for quick get-in get-out profits

(3) Great wealth and income inequality

(4) Dearth of demand from the indebted 99.9%, so dearth of investment in the real economy, which is constantly disrupted because of (2)

(5) Therefore stagnation, deflation.

(6) So... falls in interest rates and yields.

So libertas, when a yield or IR goes down it's no more than another indicator of that it's a financialised economy.

It doesn't mean that governments can reduce their debts and induce a virtuous cycle of lower taxes - higher demand - greater growth (and/or house-price inflation).

Government debt is a small part of total debt. And the main players are shadow banks, which manage the funds of the ultra-high-net-worth-individuals (i.e. just about all the investible funds since a lot of regulated bank funding finds its way into the higher-yielding, unregulated, highly leveraged shadow banks, and the average person's wealth (house) isn't investible) and suck the air out of economies (for reasons 1 to 4 above). No virtuous cycle in sight there.

Monday, February 2, 2015 11:36PM Report Comment
 

18. vinrouge said...

If banks were to offer negative interest rate mortgages, or even just zero rate, I am sure they will have a "repayable on demand" clause in their T's&C's. This will certainly be used by the banks at some point in the future (using some feeble change in the borrower's circumstances as grounds), forcing them into more profitable loans "offered" by the bank. Don't trust them, they are crooks.

Tuesday, February 3, 2015 06:41AM Report Comment
 

19. khards said...

Do banks not price default risk into mortgages anymore? The risk is still there, it hasn't gone away.
At some point recession will hit, the London financial sector will shed jobs and defaults in London will absolutely rocket from near 0% back to historical averages. Mortgage rates aren;t pricing in this risk.

Where are the credit rating agencies?
Did central banks eliminate risk again?

Tuesday, February 3, 2015 10:26AM Report Comment
 

Add comment

  • If you do not have an admin password leave the password field blank.
  • If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines
Username  
Admin Password
Email Address
Comments

Main Blog | Archive | Add Article | Blog Policies