Autumn Budget 2021
Written on 27 October 2021 by
The OBR’s revised expectation that the pandemic will permanently reduce the size of the UK economy by 2%, instead of the 3% it previously expected, gave The Chancellor more scope for his budget and the gilt market’s initial response has been extremely positive.
Yields have fallen sharply across the board, with the biggest decreases at the long end, suggesting that the market is now taking a more positive view of longer term inflationary and interest rate risks.
At the time of writing the 2 year gilt yield has today fallen by 6 basis points to 0.55% and the 5 year yield is 8 b.ps. lower at 0.71%
The yield on the closely watched 10 year gilt briefly dipped back below 1% and is now 10 b.ps. down on the day at 1.00%, which compares to a recent peak of 1.22% as recently as 6 days ago.
The 30 year yield has fallen even further to 1.16%, a huge 15 basis points drop on the day and 11 basis points lower than a month ago.
These changes will follow through to swap rates and should make lenders reassess any planned increases to the cost of fixed rate mortgages.
It is also worth noting how narrow the yield curve is now, with the spread between 2 and 30 year yields down to only 61 basis points, even less than a year ago, when it was 83 b.p.
Such a narrow yield curve is the exact opposite of what one would expect if the market was expecting a sustained increase in inflation and interest rates.
It also bodes well for the ability of lenders looking to offer 25 – 30 year fixed rate mortgages to do so at rates which are sufficiently close to shorter term fixed rates to attract a good take up.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.