Tide turning for interest rates?

Glen_Clark

10 year UK Government Bond Yields now stand at 2.93%.
Sounds low until you consider that on May 2nd they stood at 1.62%
Thats an 80% increase in 4 months
Leeds Building Society have just launched a 3% ISA.
Small investors have piled into the stock market whilst Osborne is guaranteeing 0% sub prime loans with taxpayers money.
(Traditionally the small investor, and the taxpayer, always loses)
So can Osborne's money printers hold back the tide until after the election?

alanq

Glen_Clark wrote: »

Leeds Building Society have just launched a 3% ISA.

The 3% 5-year fixed rate is available for in both ISA and non-ISA form.

Glen_Clark

alanq wrote: »

The 3% 5-year fixed rate is available for in both ISA and non-ISA form.

Ah Thanks for the udate.
I should have added the Bank of England has predicted interest rates staying low, given their record on inflation forecasting the opposite seems more likely - indeed bond yields rose as soon as they said it..

(Being undecided as usual I have;
Shares 51.3%
4.5% fixed ISA 13.8%
NSI Index linked Bonds 11.3%
Instant access cash earning 2% gross 23.5%)

John1993_2

Glen_Clark wrote: »

10 year UK Government Bond Yields now stand at 2.93%.
Sounds low until you consider that on May 2nd they stood at 1.62%
Thats an 80% increase in 4 months

No, it's a 1.31% increase in 4 months.

You've also picked the recent low as your comparison point, which does rather call for an explanation. Go back just a little further to Feb and they were at 2.2%.

Glen_Clark

If you invested £x 4 months ago you would be getting £100 interest
If you invested the same amount now you would be getting £180 interest
Thats an 80% increase in 4 months.
(Yes of course yields were higher before they bottomed out in May.)

John1993_2

Glen_Clark wrote: »

If you invested £x 4 months ago you would be getting £100 interest
If you invested the same amount now you would be getting £180 interest
Thats an 80% increase in 4 months.
(Yes of course yields were higher before they bottomed out in May.)

No-one talks about fractional changes in yields, though, especially as they can go negative. Using your language, what would you say was the increase in yield when you went from -10bp to +1%%? Would you say "interest rates wennt up by minus 1,000 percent"?

Also, you mischarectarise how yields are calculated in your example above. Yield and interest are not the same, as yield includes capital gain through draw to par on expiry.

Yield is a theoretical number, reflecting the return that you could get if you were able to reinvest the coupons at the same IRR as implied by the bond price. Because you can't assume this, you can't say that your return will match the quoted yield.

But, what do I know, I'm only an interest rates trader?..

Ark_Welder

John1993 wrote: »

No, it's a 1.31% increase in 4 months.

No, it's a 1.31 percentage point increase in 4 months. If the difference between the two was to be expressed as 'percent' then it would be stated as 80%.

John1993 wrote: »

Yield and interest are not the same, as yield includes capital gain through draw to par on expiry.

Yield is a theoretical number, reflecting the return that you could get if you were able to reinvest the coupons at the same IRR as implied by the bond price. Because you can't assume this, you can't say that your return will match the quoted yield.

The word 'yield' is rather ambiguous when used in relation to bonds, so - in this particular case - qualifying it as 'yield to maturity' would have carried more meaning.

lvader

Talk of an 80% increase while technically correct is fairly pointless. It's still just a 3% yield which isn't that great. A decent buy in price if you are light on gilts.

Glen_Clark

John1993 wrote: »

what would you say was the increase in yield when you went from -10bp to +1%%?
But, what do I know, I'm only an interest rates trader?..

Well as you are an interest rates trader perhaps you can tell us when UK Bond yields were -10bp

More seriously;
Since I referred to interest, not capital, I was treferring to the percentage increase in the interest, not the capital.
Look at this way. Say a £100k rental property yields 1.62% - £162pa
The rent is increased from £162 to £293
Does the rent increase by 1.31%, or by 80%?

Glen_Clark

lvader wrote: »

Talk of an 80% increase while technically correct is fairly pointless.

So an 80% increase is fairly pointless. (and it rose another 3% today.)
How high will it have to go before it isn't pointless?

bowlhead99

Glen_Clark wrote: »

Say a £100k rental property yields 1.62% - £162pa
The rent is increased from £162 to £293
Does the rent increase by 1.31%, or by 80%?

It's somewhat irrelevant as that one specific rental property is not the only fruit ; without knowledge of inflation and the risk adjusted prospective returns from every other opportunity out there for which your 100k could be suited, a change in the nominal amount of pounds received is meaningless. And if you are the tenant rather than landlord you would have a different set of metrics to compare with to assess the cost or value of staying in the property.

Any of these measures are useless without context. For example, say the 'risk free rate' that you could get from a government security is 1%. Of course governments can default but generally the big ones don't. Then consider a bank offering savings rates of 3% in the same currency.

Then markets change and the bank is now offering savings rates of 5% (for the sake of argument, say the risk free rate from the government has not changed).

Based on this thread, one of you would be saying that the bank's rate has gone up by 2%. The other would say the return on £10,000 has gone up from £200 a year to £500 a year which is clearly a 150% improvement.

Of course, a fuller analysis would consider other comparatives (i.e. the risk free rate) and say that the bank's premium over the risk free rate has gone up by 2% ; or that the premium over the risk free rate has doubled (100% increase, not 150% increase). This is more useful as it at least builds in the opportunitiy for incorporating the fact that over time we get different prevailing conditions, inflation and so on, and a rate on its own without considering alternatives and the general state of the union is useless.

Now going back to the first post case you could say the yield to maturity on a government 10 year bond has gone up from 1.62 to 2.93, by cherry picking yor time periods. But basically this is the risk free rate. So essentially the return has gone from risk free rate plus zero, to risk free rate plus zero. The 2.93% product today is giving the same 'relative return' as the 1.62% product a few months ago.

You might prefer to buy/save/invest today with higher yield and perhaps lower relative capital loss potential than a few months back. But effectively the market is telling you that it's at the right price, all risks and alternatives considered; just like it was before. As that's what markets do. The movement in rate is simply driven by varying perceptions of risks over time and an assessment of alternatives that is changing from period to period.