Market movements – A weak equity market and the effect on mortgage rates
Written on 6 February 2018 by
On the back of the record 1,178 points fall in the Dow (4.60% - its biggest daily percentage fall since August 2011), the yield on the 10 year US Bond fell yesterday by 12 basis points to 2.72%, reversing its recent upward trend. This is particularly interesting because the main reason cited for the large falls in US equities over the last 2 trading days is an increased fear of further interest rate rises. The mood change in the US follows on from better than expected employment figures, with the expectation that this increases the inflation risk.
A weak equity market often results in investors buying Bonds, hence yields reducing, as the money has to go somewhere. In this context, the fall in long term bond yields is not surprising.
UK gilt yields have increased sharply this year, with the 10-year gilt yield closing yesterday at 1.56%, a rise of 31 basis points over the month. Yesterday the FTSE fell by 1.46% and the oil price (Brent Crude) fell by 1.38%, taking it to more than 4% below its recent peak.
Sharp movements in the markets tend to unnerve consumers, which begs the question of what the likely impact will be on mortgage rates.
The answer is simple, there is no need to panic.
After such a large movement in the US, there was bound to be an impact in Asian and European markets today. As expected equities have fallen and bond prices have risen, pushing yields lower. At the time of writing, the UK 10 year gilt yield has fallen by 7 basis points to 1.49%. The market is likely to remain volatile, with all eyes on the US.
Despite the sharp rise in gilt yields and swap rates over the last month, market-wide competition among lenders has resulted in several lenders cutting rates and with longer term interest rates now falling back, this will reduce any pressure to increase the cost of fixed rate mortgages.
Should the equity market rout go too far, there is a potential risk of investors getting nervous enough to pull capital out of the market. However, we are not close to that happening and even if it were to occur, central banks would no doubt pump liquidity into the system.
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.