"Yesterday we saw another sharp rise in swap rates, following closely on from other recent increases. The scale of the increase was large enough to be the straw that breaks the camel's back and as a result I expect several lenders to increase the cost of at least some of their fixed rate mortgages over the next few days. With most borrowers (including around 80% of our clients) currently choosing a fixed rate mortgage, if interest rates continue to rise then the current recovery in the housing market, which is based primarily on much improved affordability as a result of the combination of lower house prices and lower interest rates, may well wobble. The message for borrowers wanting to take a fixed rate is clear; get in now or miss out on the current relatively low rates.
"There is still some comfort for those borrowers looking for a tracker rate as there is no reason for lenders to increase tracker rates just yet, based on the cost of funds; 3 month Libor has been slowly edging lower and is currently at its all time low of 1.26%. Its margin of 0.76% over Bank Rate is the lowest it has been for several months. However, lenders with particularly competitive tracker rates may still increase them if they want to reduce the volume of applications they receive. For example, Woolwich is tomorrow increasing the cost of one of its trackers by 0.5% - a particularly competitive and indeed market leading offset lifetime tracker at Bank rate + 1.99%.
Short dated gilt yields rose sharply yesterday, with the yield on 2 - 4 year gilts up by around 0.14%, although there has been a small bounce back today. Swap rates rose even more with 2 and 3 year swaps up by over 0.2% and 5 years up by 0.14%, whereas the 10 year rate increased only marginally by 0.02%. Gilt yields and swap rates reached their recent lows on May 14, the day after the publication of the Bank of England's Quarterly Inflation Report, and in just 3½ weeks since then 3 and 5 year swap rates have surged by a massive 0.62%.
Boulger continues, "This situation has some parallels with the US. The yield on the US benchmark 10 year Treasury Bond bottomed out on 15 January this year at 2.14% but less than 4 months later closed a whopping 1.74% higher than this yesterday at 3.88%. As a consequence rates on a US 30 year fixed rate mortgage, the most common type of mortgage in the US, have risen by 0.45% in the last month alone to around 5.45%, compared to the recent low of 4.85%.
"These changes in both swap rates and short dated gilt yields happened at a time when the Bank of England's Quantitative Easing programme is designed to drive down yields and it presents the Prime Minister, The Chancellor and the Bank of England with a major problem. Having pushed Bank Rate down to almost zero the strategy is to boost the economy by reducing the cost of longer term borrowing. This sharp upward movement in market rates demonstrates that the Government is impotent in this area and has lost control of interest rates except at the very short term end."
