Gilt Yields Collapse - Cost of Fixed Rate Mortgages to Fall Further

Posted on 15 October 2014 by Ray Boulger

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Gilt Yields Collapse - Cost of Fixed Rate Mortgages to Fall Further

The main beneficiary of the rapid mood change of the global economic situation and the consequent sell off in equities (The FTSE 100 index is one of the better performing European equity indices today – it is only! down by 2.75%) has been money piling into Government Bonds, which pushes yields down. Following a steady decline in yields over the last few days the market has surpassed itself today with one of the largest single day falls for a long time.

2 year gilt yields have closed 8 basis points down today but the 5 year by a massive 19 basis points and the 10 year by nearly as much - 17 basis points. Over the last month the reduction in gilt yields is as follows:

  • 2 year:  0.30% to 0.51%.
  • 5 year:  0.57% to 1.23%.
  • 10 year: 0.57% to 1.95%.
  • 30 year: 0.45% to 2.74%.

Despite the recent sharp fall 2 year yields are still marginally higher than a year ago - 0.04% - but longer term rates have fallen substantially over this period as the market reassesses the likely timing of not only the first but also subsequent Bank Rate rises, plus the more benign inflation outlook. Over the last year the 5 year gilt yield has fallen 0.38%, with 10 and 30 year down more than twice as much, by 0.83% and 0.86% respectively.

This has been reflected in swap rates, a key factor in lenders’ cost of funds when pricing fixed rates mortgages. As an example 5 year swaps closed today at 1.47%, compared with a recent peak of 2.29% only 3½ months ago; the 10 year swap closed at 2.04%.

Only a few lenders have cut the cost of their fixed rates this week but as a result of not only today’s massive fall in the cost of funds, but also the cumulative effect of recent falls, all lenders have a lot of catching up to do in their fixed rate pricing.

For example Accord announced a market leading 5 year fix of 2.59% at the end of last week, available up to 65% LTV with a £975 fee, but this is unlikely to remain the lowest rate for long. In fact I think there is a strong chance we will soon see some 5 year fixes challenging the previous lowest ever 5 year fix of 2.48%, which was available nearly two years ago! 


The views expressed here are those of the author and do not necessarily represent or reflect the views of John Charcol Ltd

Categories: Bank of England, Mortgages, House and home, Interest rates, Remortgaging


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