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

phillw

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..

It's all marketing. Similar to 5% on £2000 by TSB in 2014.

We aren't the target of the marketing, they don't want us at all. We will shove £5000 in Barclays and the rest in Santander and the next time someone else announces a rise we will move it all again.

What they want are the people who will be swayed by the media frenzy and stories of IT melt down because of the stampede, but then never move again.

Chase probably didn't expect interest rates to change much, but in hindsight they moved too early. I can't think why anyone would still be using them now.

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.

Martin Lewis repeated the same linkage last night on his television programme.

Variable, discount and tracker mortgages were based on the current BoE rate. Fixed rate mortgages were different and based upon the swap rate which mainly meant gilts and hence based on future expected rates.

masonic

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.

Martin Lewis repeated the same linkage last night on his television programme.

Variable, discount and tracker mortgages were based on the current BoE rate. Fixed rate mortgages were different and based upon the swap rate which mainly meant gilts and hence based on future expected rates.

I'm not sure what gives him the confidence that variable rate mortgages would fall in line with future cuts to the base rate, as tracker mortgages would. That's not how it has worked historically. Tracker mortgages are a thing precisely because lenders tend not to maintain a strong link between base rate and mortgage rate in their variable mortgages. It seems pretty clear these rates are considerably higher than the current BoE base rate.

Regarding fixed rate mortgages, you can be your own judge of whether rates are more in line with SONIA swap rates vs gilt yields. Gilt yields give you the risk-free rate above which all riskier lending commands a risk premium known as a credit spread. Seems to me Martin is conflating these concepts in the interest of presenting a simplistic view. Though I don't understand why the gilt yield curve is any easier for the average person to comprehend - perhaps it's just that it's been all over the news of late.

RG2015

masonic 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.

Martin Lewis repeated the same linkage last night on his television programme.

Variable, discount and tracker mortgages were based on the current BoE rate. Fixed rate mortgages were different and based upon the swap rate which mainly meant gilts and hence based on future expected rates.

I'm not sure what gives him the confidence that variable rate mortgages would fall in line with future cuts to the base rate, as tracker mortgages would. That's not how it has worked historically. Tracker mortgages are a thing precisely because lenders tend not to maintain a strong link between base rate and mortgage rate in their variable mortgages. It seems pretty clear these rates are considerably higher than the current BoE base rate.

Regarding fixed rate mortgages, you can be your own judge of whether rates are more in line with SONIA swap rates vs gilt yields. Gilt yields give you the risk-free rate above which all riskier lending commands a risk premium known as a credit spread. Seems to me Martin is conflating these concepts in the interest of presenting a simplistic view. Though I don't understand why the gilt yield curve is any easier for the average person to comprehend - perhaps it's just that it's been all over the news of late.

I agree that base rate tracker mortgages are the only ones that by definition are directly linked to the BoE rate.

Beyond this, we are talking mainstream tv so it would have to be basic but I guess it is not completely wrong.

I do wonder though if the great man himself really does have a firm understanding of the deeper issues.

Then again I could ask the same question of our esteemed PM and various recent Chancellors of the Exchequer.

RG2015

In am attempt to get the thread back on track, I am interested to explore if there is any link between fixed rate savings rates and fixed mortgage rates.

It does appear that they are both market driven but also driven by the FI's projections and expectations

pecunianonolet

I have the slight feeling that some people not understand the fundamentals of monetary and fiscal policy.... they both should create an equilibrium. What we have seen over a long period of time is disastrous fiscal politics and in all fairness some sort of fear by monetary policy makers to raise rates earlier because of the effects this could cause. Less of an issue if adjustments are made over long periods but we see rapid changes creating a market shock adjusting disbalance to get back to an equilibrium.

I would recommend to read about https://en.wikipedia.org/wiki/Money_creation

Unbelievable amounts of money has been created and pumped into the economy in UK, the Euro zone, the US so this is not an exclusive problem because they all vastly run on debt and as long as GDP and growth can offset borrowing it is a never ending circle with the bubble getting bigger and bigger. In short, every time somebody takes out a load, mortgage, credit card spending etc. new money is generated

Fact is that interest is nothing else as the price of risk.

So fixed saving rates are higher because I give up my right to access funds for a certain amount of time and the bank is paying me in return a premium for that as my risk of default is higher. Following that theory, the longer I lock away the higher the rate should be (higher default risk). However, what we see is an inverted yield curve and that is a proven indicator for recession.

Now we have other factors, pension funds in need to generate high profits (final salary pension payments, etc), the bond market, currency stability and much more paired with a lot of financial products like derivates, swaps, etc. and we have the perfect casino.

A lot of the products we see just now available for a short period of time, at low limits, etc is nothing else as a sort of marketing tool to collect short term liquidity (collateral) to back up much riskier products investment banker deal with on a daily basis.

A bit older but more than recommended: https://www.bbc.co.uk/iplayer/episodes/m0013xch/the-decade-the-rich-won

masonic

RG2015 said:

In am attempt to get the thread back on track, I am interested to explore if there is any link between fixed rate savings rates and fixed mortgage rates.

It does appear that they are both market driven but also driven by the FI's projections and expectations

Yes, and you could also throw in desperation (do you remember the Newcastle BS 5 year 5% ISA and fixed bond launched c.2010, way above any other offer at that time because they were rumoured to have liquidity problems?)