Interest rates set to remain held

purch

Don't bet on it

I'm not betting on it. It just fitted in nicely to change the word month to year :cool:

But I will bet that they will allow the curve to steepen as much as they can get away with before being forced to raise the Base Rate.

the_ash_and_the_oak

Dan: wrote: »

I would think they will rise at 0.25 or 0.50 every couple of months, they wont force them up in massive chunks (regardless of what inflation is doing) or it will undo all the work they have achieved. Nice, slow and steady increases.

Most people coped with interest rates at 6% in 2007, and will cope with them at this level again, so it won't have much effect except preventing HPI - which is a good thing.

I will feel sorry for some of the people on here who held off from buying only to end up with a more expensive mortgage tho.

pretty sure mortgages have only got cheaper really for existing borrowers not newer borrowers imo - not sure there's been that much to miss out on, dealwise

Generali

Ok. Explanation. Please don't complain that it's dull as I can't help that.

First a bit of jargon.

A Gilt is a bond issued in Sterling by the UK Government. It is one of the safest assets in the world.

A repo (repurchase agreement) is a way for a bank to borrow money from another bank. One bank sells a Gilt to another, agreeing to repurchase it at a later date at a higher price, the higher price representing the interest that the bank borrowing money is paying. The interest on the Gilt is paid to the party that originally owned the Gilt, not the party holding it as security.

For example, imagine HSBC needs to borrow some money overnight and Barclays has a little excess cash. HSBC might sell Gilts worth GBP100,000,000 to Barclays and buy them back the next day for GBP100,010,000. The GBP10,000 difference is the interest paid by HSBC for borrowing the money for the day*.

The Base Rate that the Bank of England announces once a month is the rate of interest that they'll charge on a repo. Currently the base rate is 0.5% so they'll enter into a 3 month repo (that means the money is borrowed for 3 months) at a rate of about 0.125%.

However, the Government doesn't borrow money at the base rate. It borrows at whatever rate of interest it has to pay to private lenders.

So let's take an extreme example. Base rates are 1%. Gilt yields are 50%. That means banks can lend money to the Government at 50% and borrow it back at 1%. Remember that the bank that originally owned the Gilts gets the interest. So let's say Generali Bank wants to borrow GBP100,000,000 overnight from the BoE with those rates of interest above. The process is as follows:

- Generali Bank buys GBP100,000,000 of Gilts yielding 50%, spending GBP100,000,000 on them.
- The same day, Generali Bank enters into an overnight repo with the Bank of England. The rate of interest is 1%pa (as the Base Rate is 1%) so they will sell the Gilts for GBP100,000,000 to the Bank of England and buy them back for GBP100,002,740.

Now right now, Generali Bank has only had a total outlay of GBP2,740 (GBP100,000,000x1%/365).

- The interest on the Gilts that has accumulted overnight is GBP136,986 (GBP100,000,000x50%/365). As a result, Generali Bank has made a profit of over GBP130,000 with zero risk. Nice work if you can get it!

Hopefully that makes sense.




*I realise that's a simplification as it doesn't take into account the change in the value of the Gilt overnight but it serves as an example IMO.

purch

Hopefully that makes sense

ZZZzzzzzzzzzzzzzzzzz !!!!!

inspector_monkfish

Generali wrote: »

So let's take an extreme example. Base rates are 1%. Gilt yields are 50%. That means banks can lend money to the Government at 50% and borrow it back at 1%. Remember that the bank that originally owned the Gilts gets the interest. So let's say Generali Bank wants to borrow GBP100,000,000 overnight from the BoE with those rates of interest above. The process is as follows:
.

that is extremely extreme old chap!

dont really follow gilts too closely, but last time i looked the yeild was only around 3%, so that would make quite a significant dent in any profit !

Generali

inspector_monkfish wrote: »

that is extremely extreme old chap!

dont really follow gilts too closely, but last time i looked the yeild was only around 3%, so that would make quite a significant dent in any profit !

It is an extreme example but it does illustrate why short Gilt yields and the Base Rate can't diverge by too much.

purch wrote: »

ZZZzzzzzzzzzzzzzzzzz !!!!!

I warned you!

steve237

If the base rate does stay at 0.5% for the next year or more, how does everyone think this will effect the fixed rate mortgage deals offered to home owners?

I ask because I am trying to decide whether to jump on a 5 or 7 year fixed deal (4.99 / 5.39%) as my tracker comes to an end in 4 weeks time... or hold out on the SVR (4.24%) in the hope that fixed rates may come down even more.

Generali

steve237 wrote: »

If the base rate does stay at 0.5% for the next year or more, how does everyone think this will effect the fixed rate mortgage deals offered to home owners?

I ask because I am trying to decide whether to jump on a 5 or 7 year fixed deal (4.99 / 5.39%) as my tracker comes to an end in 4 weeks time... or hold out on the SVR (4.24%) in the hope that fixed rates may come down even more.

Fixed rate mortgages are priced in part according to prices of something called an interest rate swap. The price of this moves in line with future interest rate exectations.

At present, many people believe that the worst of the recession may be over which means that they think that interest rates are more likely to rise. As a result it is likely that swap rates and thus fixed rate mortgages will rise in price.

I'd fix now personally. That may prove to be a good or a bad decision - there's no way to know in advance.

Thrugelmir

Generali wrote: »

Ok. Explanation. Please don't complain that it's dull as I can't help that.

First a bit of jargon.

A Gilt is a bond issued in Sterling by the UK Government. It is one of the safest assets in the world.

A repo (repurchase agreement) is a way for a bank to borrow money from another bank. One bank sells a Gilt to another, agreeing to repurchase it at a later date at a higher price, the higher price representing the interest that the bank borrowing money is paying. The interest on the Gilt is paid to the party that originally owned the Gilt, not the party holding it as security.

For example, imagine HSBC needs to borrow some money overnight and Barclays has a little excess cash. HSBC might sell Gilts worth GBP100,000,000 to Barclays and buy them back the next day for GBP100,010,000. The GBP10,000 difference is the interest paid by HSBC for borrowing the money for the day*.

The Base Rate that the Bank of England announces once a month is the rate of interest that they'll charge on a repo. Currently the base rate is 0.5% so they'll enter into a 3 month repo (that means the money is borrowed for 3 months) at a rate of about 0.125%.

However, the Government doesn't borrow money at the base rate. It borrows at whatever rate of interest it has to pay to private lenders.

So let's take an extreme example. Base rates are 1%. Gilt yields are 50%. That means banks can lend money to the Government at 50% and borrow it back at 1%. Remember that the bank that originally owned the Gilts gets the interest. So let's say Generali Bank wants to borrow GBP100,000,000 overnight from the BoE with those rates of interest above. The process is as follows:

- Generali Bank buys GBP100,000,000 of Gilts yielding 50%, spending GBP100,000,000 on them.
- The same day, Generali Bank enters into an overnight repo with the Bank of England. The rate of interest is 1%pa (as the Base Rate is 1%) so they will sell the Gilts for GBP100,000,000 to the Bank of England and buy them back for GBP100,002,740.

Now right now, Generali Bank has only had a total outlay of GBP2,740 (GBP100,000,000x1%/365).

- The interest on the Gilts that has accumulted overnight is GBP136,986 (GBP100,000,000x50%/365). As a result, Generali Bank has made a profit of over GBP130,000 with zero risk. Nice work if you can get it!

Hopefully that makes sense.




*I realise that's a simplification as it doesn't take into account the change in the value of the Gilt overnight but it serves as an example IMO.

The other problem for the Government is that to attract investors to the raft of Gilts issues to fund the budget deficit. It has to offer attractive yields.

The latest issue yielded 4.25%. So we are now in a position where it is possible to borrow cheap and reinvest at a higher income.

A similar situation to the Icelandic banks (shortly before they went bust).

Which ever way you look at this. Its creating problems for the future.

Generali

Thrugelmir wrote: »

The other problem for the Government is that to attract investors to the raft of Gilts issues to fund the budget deficit. It has to offer attractive yields.

The latest issue yielded 4.25%. So we are now in a position where it is possible to borrow cheap and reinvest at a higher income.

A similar situation to the Icelandic banks (shortly before they went bust).

Which ever way you look at this. Its creating problems for the future.

Absolutely right. I was addressing a different issue but fundamentally if Governments around the world are going to run massive deficits then they're going to have to get the money from somewhere.

Perhaps the plan is to print all the money. It would solve one problem.

One point about the 'carry' opportunity you note above. It's pretty risky as you're borrowing short and lending long at a time when being able to continue borrowing is far from certain.