Inflation, Interest Rates, yield curves, instant vs fixed rate savings & gilts

hallmark

hallmark said:

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Already down to 4.08%

Hoenir

hallmark said:

hallmark said:

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Already down to 4.08%

There's still a lot of liquidity chasing yields driving market prices down.  Many corporate entities were able to borrow at sub 3% fixed rates. Just like consumers. Rather than repay the debt currently they can obtain a better return elsewhere for the time being. The great unwinding reset is in play.  There's no historic guidebook to call on as to how QT will eventually play out. 

sevenhills

masonic said:

The main reason for reducing rates is to stave off a recession, and having the headroom to do that is a mark of a healthy economy. The economy has been quite resilient to the normalisation of rates, and while we are technically in recession now, it looks like a fairly soft landing with no real need to risk inflation biting back. A return to a regime of very low rates gives the MPC nowhere to go when the economy really starts tanking. 

If CPI went to a sustained 1% or so, then perhaps the 3-3.5% base rate promised originally may materialise, but I don't think it is very likely inflation will settle that low.

Very difficult to get inflation to 1% when pay rises are beating inflation(Jan 2024) and ....

"The Resolution Foundation, an independent think-tank, says the minimum wage increase(that comes in today) represented a rise of 7.8% in real terms - once inflation was taken into account - and a 9.8% rise in cash terms.

Altior

Central banks around the world tend to follow the lead of the Fed, which is widely expected to hold rates at 5.25% to 5.5%.

This was ignored at the end of 2022, however it is easily the key point. The rest of it is just 'noise'. The BoE won't move in a significant way until they know that the Fed will be moving. As otherwise sterling would be put under huge pressure. 

Expectation has changed as Fed signalling has changed, and now cuts look further away than initially anticipated (but still expected). 

For what it's worth, I disagree that it's not worth trying to second guess what will happen. It certainly is, but doesn't mean you'd necessarily be correct. It just means that you're relying on your own judgement, and not the judgement of those that for example were maintaining that inflation was 'transitory'.

Rollinghome

Altior said:

For what it's worth, I disagree that it's not worth trying to second guess what will happen. It certainly is, but doesn't mean you'd necessarily be correct. It just means that you're relying on your own judgement, and not the judgement of those that for example were maintaining that inflation was 'transitory'.

"Transitory" is a useful word for economists.  It's wider meaning is 'not permanent', and as no rate of inflation ever is permanent, it comes in handy. Even the inflation of the seventies turned out not to be permanent but felt very like it at the time.

Altior

Rollinghome said:

Altior said:

For what it's worth, I disagree that it's not worth trying to second guess what will happen. It certainly is, but doesn't mean you'd necessarily be correct. It just means that you're relying on your own judgement, and not the judgement of those that for example were maintaining that inflation was 'transitory'.

"Transitory" is a useful word for economists.  It's wider meaning is 'not permanent', and as no rate of inflation ever is permanent, it comes in handy. Even the inflation of the seventies turned out not to be permanent but felt very like it at the time.

I agree but in this context it was used as a term to defend/justify keeping central rates on the floor when inflation was already taking off, ie they didn't expect (claiming they didn't expect) to have to ramp them up. They should of course been already steadily raising them as there is a lag between central rate changes and the expected impact on prices.  

Personally, I had a big financial decision to make at the time so I was paying particular attention to the BoE commentary, and their arguments. I simply did not believe them as I thought significant rate rises were inevitable (just delayed), so I locked in an extended fixed rate on my mortgage. 

Nobody knows what will happen, but we can apply logic. I don't anticipate the UK having significantly different central rates to the US in the short to medium term, so in my view it's much more important to follow what is happening there (in data reporting, Fed signals and politically). 

hallmark

Yields fell shortly after this thread then rose fairly sharply and are currently falling back again.  I pulled the trigger a couple weeks ago and locked in about 4.40%.

I still expect the BOE to cut far more than markets are predicting.  I know some think the MPC will follow the Fed and won't cut until the Fed does.  I think this is incorrect.  The MPC waited until after the Fed moved to raise rates, because the MPC is doveish.  That won't be true when it comes to reducing rates. I believe the MPC will reduce before the Fed does. We'll see.

gravel_2

hallmark said:

Yields fell shortly after this thread then rose fairly sharply and are currently falling back again.  I pulled the trigger a couple weeks ago and locked in about 4.40%.

I still expect the BOE to cut far more than markets are predicting.  I know some think the MPC will follow the Fed and won't cut until the Fed does.  I think this is incorrect.  The MPC waited until after the Fed moved to raise rates, because the MPC is doveish.  That won't be true when it comes to reducing rates. I believe the MPC will reduce before the Fed does. We'll see.

What's your strategy with them? Are you holding to maturity or intending to sell if the BOE rate drops and the price heads north?

Nebulous2

hallmark said:

Yields fell shortly after this thread then rose fairly sharply and are currently falling back again.  I pulled the trigger a couple weeks ago and locked in about 4.40%.

I still expect the BOE to cut far more than markets are predicting.  I know some think the MPC will follow the Fed and won't cut until the Fed does.  I think this is incorrect.  The MPC waited until after the Fed moved to raise rates, because the MPC is doveish.  That won't be true when it comes to reducing rates. I believe the MPC will reduce before the Fed does. We'll see.

That would be dangerous for the pound. The UK still hasn't regained the confidence of the markets following the Liz Truss setting ourselves alight episode. 

gravel_2

Is there a simple way for maths dumb-dumbs to calculate rough estimate price for gilts in case of BOE rate changes? I've googled it and found formulae but means nothing to me.