Are fixed savings account rates driven by the bond market or the BoE base rate?

RG2015

masonic said:

RG2015 said:

I heard a chap on the radio today saying that variable rate mortgage rates followed the BoE rate and fixed mortgage rates followed bond rates.

I hadn’t heard that before but it makes sense.

It doesn't make sense to me. The money banks use to fund fixed mortgages isn't usually obtained by from them issuing corporate bonds. The rate an institution can borrow at in bond markets is driven largely by their own credit rating. Did the chap on the radio give an explanation as to why bond markets have anything to do with mortgage lending?

Tracker mortgage rates follow the BoE base rate, but other types of variable rate mortgages are often disconnected from changes to the base rate. Only those with tracker mortgages saw their rates follow the base rate down to historic lows in 2008-9.

He didn't go into details but sounded quite authoritative. Claimed to be a money saving expert. You may have heard of him, Martin Lewis. 

masonic

RG2015 said:

masonic said:

RG2015 said:

I heard a chap on the radio today saying that variable rate mortgage rates followed the BoE rate and fixed mortgage rates followed bond rates.

I hadn’t heard that before but it makes sense.

It doesn't make sense to me. The money banks use to fund fixed mortgages isn't usually obtained by from them issuing corporate bonds. The rate an institution can borrow at in bond markets is driven largely by their own credit rating. Did the chap on the radio give an explanation as to why bond markets have anything to do with mortgage lending?

Tracker mortgage rates follow the BoE base rate, but other types of variable rate mortgages are often disconnected from changes to the base rate. Only those with tracker mortgages saw their rates follow the base rate down to historic lows in 2008-9.

He didn't go into details but sounded quite authoritative. Claimed to be a money saving expert. You may have heard of him, Martin Lewis. 

Then he seems to be contradicting himself. It was Martin Lewis who was always going on about needing to be on a tracker mortgage if you want it to follow the base rate. I think he's wrong on all counts based on your account of what he said today.

RG2015

masonic said:

RG2015 said:

masonic said:

RG2015 said:

I heard a chap on the radio today saying that variable rate mortgage rates followed the BoE rate and fixed mortgage rates followed bond rates.

I hadn’t heard that before but it makes sense.

It doesn't make sense to me. The money banks use to fund fixed mortgages isn't usually obtained by from them issuing corporate bonds. The rate an institution can borrow at in bond markets is driven largely by their own credit rating. Did the chap on the radio give an explanation as to why bond markets have anything to do with mortgage lending?

Tracker mortgage rates follow the BoE base rate, but other types of variable rate mortgages are often disconnected from changes to the base rate. Only those with tracker mortgages saw their rates follow the base rate down to historic lows in 2008-9.

He didn't go into details but sounded quite authoritative. Claimed to be a money saving expert. You may have heard of him, Martin Lewis. 

Then he seems to be contradicting himself. It was Martin Lewis who was always going on about needing to be on a tracker mortgage if you want it to follow the base rate. I think he's wrong on all counts based on your account of what he said today.

Okay, I'll see if I can find it online. BBC Radio 5 Live at about 1:30. I may have heard incorrectly.

RG2015

RG2015 said:

masonic said:

RG2015 said:

masonic said:

RG2015 said:

I heard a chap on the radio today saying that variable rate mortgage rates followed the BoE rate and fixed mortgage rates followed bond rates.

I hadn’t heard that before but it makes sense.

It doesn't make sense to me. The money banks use to fund fixed mortgages isn't usually obtained by from them issuing corporate bonds. The rate an institution can borrow at in bond markets is driven largely by their own credit rating. Did the chap on the radio give an explanation as to why bond markets have anything to do with mortgage lending?

Tracker mortgage rates follow the BoE base rate, but other types of variable rate mortgages are often disconnected from changes to the base rate. Only those with tracker mortgages saw their rates follow the base rate down to historic lows in 2008-9.

He didn't go into details but sounded quite authoritative. Claimed to be a money saving expert. You may have heard of him, Martin Lewis. 

Then he seems to be contradicting himself. It was Martin Lewis who was always going on about needing to be on a tracker mortgage if you want it to follow the base rate. I think he's wrong on all counts based on your account of what he said today.

Okay, I'll see if I can find it online. BBC Radio 5 Live at about 1:30. I may have heard incorrectly.

Just checked on BBC catch up and he said it was simplified but he did say that variable rates were broadly based on the BoE and fixed rates broadly followed the swap rate which in turn followed gilts.

masonic

RG2015 said:

RG2015 said:

masonic said:

RG2015 said:

masonic said:

RG2015 said:

I heard a chap on the radio today saying that variable rate mortgage rates followed the BoE rate and fixed mortgage rates followed bond rates.

I hadn’t heard that before but it makes sense.

It doesn't make sense to me. The money banks use to fund fixed mortgages isn't usually obtained by from them issuing corporate bonds. The rate an institution can borrow at in bond markets is driven largely by their own credit rating. Did the chap on the radio give an explanation as to why bond markets have anything to do with mortgage lending?

Tracker mortgage rates follow the BoE base rate, but other types of variable rate mortgages are often disconnected from changes to the base rate. Only those with tracker mortgages saw their rates follow the base rate down to historic lows in 2008-9.

He didn't go into details but sounded quite authoritative. Claimed to be a money saving expert. You may have heard of him, Martin Lewis. 

Then he seems to be contradicting himself. It was Martin Lewis who was always going on about needing to be on a tracker mortgage if you want it to follow the base rate. I think he's wrong on all counts based on your account of what he said today.

Okay, I'll see if I can find it online. BBC Radio 5 Live at about 1:30. I may have heard incorrectly.

Just checked on BBC catch up and he said it was simplified but he did say that variable rates were broadly based on the BoE and fixed rates broadly followed the swap rate which in turn followed gilts.

I'd agree that variable rates are broadly based on BoE base rate (because they are based on the rate the mortgage lender has to pay for the capital it lends (e.g. savings rates), which are broadly based on BoE base rate). The swap rate is what wmb194 described here. Gilt rates and swap rates are affected my many of the same factors, but this is correlation, not causation.

RG2015

The whole topic is very imprecise and therein lies the problem. Correlation is easy to observe with hindsight but may not be as clear cut for predictions.

This is partly why so many people expect savings rates to automatically rise with BoE increases. They infer a causal link when business decisions here are far more involved.

masonic

RG2015 said:

This is partly why so many people expect savings rates to automatically rise with BoE increases. They infer a causal link when business decisions here are far more involved.

Agree completely. Markets are forward looking and driven by sentiment and supply/demand, including the savings market. Fixed rate accounts are going to be priced according to what the institution thinks will happen to rates over the whole period, not just what has happened at the latest MPC meeting. A recession could put the brakes on lending, and drive down demand from savings institutions (back to the regime of 'they don't need our money').

phillw

masonic said:
I'd agree that variable rates are broadly based on BoE base rate (because they are based on the rate the mortgage lender has to pay for the capital it lends (e.g. savings rates), which are broadly based on BoE base rate).

I'd disagree as back when BoE was up at it's normal (and yet now alien) rate of 5%, banks were able to borrow money below BoE and then crazily offered trackers below base rate. Worryingly still, they didn't include wording to say what happened if that turned negative and in rare cases were actually paying people interest for their mortgages.

Since the 2008 GFC the rules of the game have changed a lot, but it will all change again.

RG2015 said:

This is partly why so many people expect savings rates to automatically rise with BoE increases. They infer a causal link when business decisions here are far more involved.

Have you noticed how ice cream vans cause global warming? Every time you hear one, it's really hot.

RG2015

I would love to hear the rationale behind the recent savings rate decisions by Barclays (5.00%), Santander (2.75%) and earlier outlier decisions by Chase and Marcus..

Yes, these attracted massive inflows but none of these needed to be as high as they were.

masonic

RG2015 said:

I would love to hear the rationale behind the recent savings rate decisions by Barclays (5.00%), Santander (2.75%) and earlier outlier decisions by Chase and Marcus..

Yes, these attracted massive inflows but none of these needed to be as high as they were.

I would wheel out separate rationales for the two products:

• Barclays - it's a perk attached to their current account and on a limited sum of money. To be treated in a similar manner to current account ongoing rewards etc.
• Santander - as it is more or less no strings attached savings, they probably had a funding target they wanted to meet quickly. The account will be pulled when they've attracted enough cash.