Demand is screwed, says the head of the IMF

OptionARMAGEDDON

So I suppose all those involved in determining the fixed will be willing to lend at 2% if they have the slightest inkling that rates could be 4% in 2 years for example? Dont be stupid. Of course market expectations of play into these figures.

gagahouse

OptionARMAGEDDON wrote: »

So I suppose all those involved in determining the fixed will be willing to lend at 2% if they have the slightest inkling that rates could be 4% in 2 years for example? Dont be stupid. Of course market expectations of play into these figures.

You were talking about base rates, the fixed rate on a 10 yr swap has nothing to do with expectations of base rates in 10yrs time. Rather it is related to the yield curve, where the current 10yr gilt would be, and is priced as a spread over it. So it's not related to expectations of where the shortest rate possible, the central bank overnight base rate, would be. I refer you again to short term interest rate futures for market expectations.

Nor is a bank lending @ fixed, they are exchanging fixed for floating payments with each other or a client. They are not taking a directional view, they are offsetting the interest rate risk inherent in borrowing short at variable rates and lending long at fixed rates, that is why they are able to offer 5yr fixes when they borrow at rates tied to 3m Libor. They don't care where Libor will be in 2 years, the whole point of using a swap is to lock in the interest rate differential of the yield curve today.

Degenerate

OptionARMAGEDDON wrote: »

With inflation still above where we could do with it, can the BOE pump more cash into the system? Its going to be more difficult than in 08/09.

Why more difficult? We're exactly where we were in mid 2008. Then, as now, we were at the peak of a commodity-led inflation surge, with a banking crisis looming and about to deliver a large deflationary shock. As you appear to acknowledge:

With prices of resources crashing globally, its pretty plain to see the deflationary camp were probably right. Will commodities fall like they did in 08? Probably not. But fall significantly they have been, and will continue to do.

OptionARMAGEDDON

People are associating the last bout of QE with the uptick in inflation we saw. Many are already struggling and whilst few laypeople understood the potential implications of QE, the same is not true. The fact it was named something few people understood was not a coincidence imho. We have a saying "B*llshit baffles brains". Applies here. Or at least, did.

Check out todays Daily mail if you want to see what the proles associate with QE these days.

http://www.dailymail.co.uk/news/article-2042187/Bank-England-Crippling-cost-living-price-worth-paying-save-jobs.html

Degenerate

OptionARMAGEDDON wrote: »

People are associating the last bout of QE with the uptick in inflation we saw.

CPI Inflation peaked at over 5% in mid 2008, with interest rates over 5% and no QE. Then, as now, it was driven by commodity prices, not money supply.

The broad money supply has not significantly expanded since then. The whole reason interest rates were slashed and QE started was to fill a massive hole in the money supply caused by the collapse of the credit element. The same thing is looking likely to happen again.

Fortunately, the BOE don't take advice from the economic illiterates who write for the Daily Fail.

OptionARMAGEDDON

gagahouse wrote: »

You weren't showing Libor though were you? What you were actually showing was the fixed side of the swap, not the floating Libor part, which is obviously unknowable 10 years hence.

So they tell you nothing about where the market expects short term rates to be 10 years forward. Short term interest rate futures are where you need to look for market expectations of the base rate and those only go out to 2 years.

Whoopsy, looks as if this is money agrees with me and disagrees with you :rotfl::rotfl::rotfl:

Rate rise predictions: Money markets and economists
Mainstream forecasts for the first rise range between summer 2011 to early 2012. See economists' views below.
Swap markets reflect the City's bank rate expectations - not in an exact way, but they indicate trends in forecasting.
I've listed some historic swap rate prices (all taken mid-morning unless stated) and charts below to show how the market moves as economic prospects shift.
8 September
• 1.20% - one year
• 1.21% - two years
• 1.71% - five years

12 September
• 1.22% - one year
• 1.22% - two years
• 1.63% - five years

19 September
• 1.20% - one year
• 1.19% - two years
• 1.65% - five years

21 September
• 1.17% - one year
• 1.17% - two years
• 1.67% - five years

26 September
• 1.19% - one year
• 1.20% - two years
• 1.73% - five years

Read more: http://www.thisismoney.co.uk/money/news/article-1607881/Interest-rates-News-predictions.html#ixzz1ZDeSiVok

gagahouse

OptionARMAGEDDON wrote: »

Whoopsy, looks as if this is money agrees with me and disagrees with you :rotfl::rotfl::rotfl:[/B]

!!!!!! , first you don't even know the difference between the Libor leg and the fixed side of the swap, showing a table of fixed rates saying they are Libor, conveniently ignored that one haven't you?

Edit: has anyone seen the latest LIBOR rates? They are obscene! Base rate below 2.5% for the NEXT TEN YEARS!

Then you come out with this pearl, saying base rates will be below 2.5% for 10 years by looking at the fixed rate in the table which is tied to the 10yr gilt rate - what part do you not get ? 10yr rate does not equal the base rate you muppet

then you say they are lending at the fixed rate again displaying your ignorance of how a swap is used

the only swap rate that gives a clue of base rate expectations would be the shortest dated 1yr , not the 10 yr, but seeing as there is a spread over the gilt it would be more accurate to just use the gilt yield

seeing as you're such a genius and an expert in interest rate swaps :rotfl:, please show how the fixed leg on a 10yr swap equates to expectations of the base rate for the next 10 years, after all that is your assertion

Base rate below 2.5% for the NEXT TEN YEARS!