Mortgage Rates after Unemployment Figures and Fed Tapering
Posted on 19 December 2013 by
Yesterday evening the Fed announced it will start the long awaited taper of its QE programme, reducing its monthly purchases of Government Bonds and RMBS by $10bn (12%) to a still very significant £75bn per month. When the biggest buyer of US Bonds announces it is reducing the volume of its purchases one might expect a sharp fall in bond prices and hence an increase in yields. However, this move has been well signposted for several months, the only question being when the Fed would reduce its purchases and by how much. Thus most of the impact was already reflected in the market. In addition a reduction of only $10bn per month was rather less than most economists expected.
A further important factor is the comment from Ben Bernanke that a rise in the Fed funds rate (i.e. broadly the US equivalent to our Bank Rate) is still a long way off.
The gilt market has reacted by pushing yields up but not too dramatically. The yield on 5 year gilts has risen by 8 basis points today and 10 year gilts by 4 basis points.
Both Wednesday’s better than expected UK unemployment figures and the Fed action suggest an upward movement in interest rates, but of course we already knew rates would rise. What we don’t know is when and how quickly and so the question is do these two factors change the expected timescale.
Looked at in isolation both the unemployment figures and the Fed action would be interpreted as bringing forward the likely date for a Bank Rate increase. However, comments from several MPC members over the last few weeks have made it very clear that unemployment falling to 7% is only a trigger for consideration of a rate rise, not for one to be implemented. Furthermore the fact that recently an MPC member has actually mentioned targeting an unemployment figure of 6.5% is a strong indication that, providing CPI remains close to, or below, 2% Bank Rate will be kept at 0.5% well beyond the time when unemployment falls below 7%.
One area where Bank of England policy may differ from the Fed is that Mark Carney has stated that Bank Rate will rise before QE starts to be unwound. It is not clear what the Fed policy will be on this as it is still buying both government bonds and RMBS. However, Ben Bernanke stated yesterday that a rate rise is still a long way off, which is probably more relevant in trying to gauge when the Fed will raise interest rates than a fairly modest, but well signposted, reduction in its monthly QE buying programme.
In the UK Mark Carney has stated that if necessary he will take further action to cool the housing market and this suggests the MPC will not be pushed into increasing Bank Rate to control the housing market when the rest of the economy does not justify an increase. LTV caps are out of the question whilst Help to Buy is in place and loan to income caps would be very difficult to police and so if the Bank considers further action is necessary the use of macro prudential tools would probably make the most sense, e.g. by amending either capital adequacy or leverage controls.
With the increasingly global nature of markets, plus Mark Carney’s North American history, the message from the Fed, coupled with the ongoing weak economic situation in the biggest destination for our exports, the Eurozone, suggests that a Bank Rate rise is still at least 2 years away, despite the improving unemployment figures and the Fed tapering. That takes us beyond the next General Election, following which, whichever party or parties are in Government, there is likely to be further belt tightening, which in the short term will reduce GDP growth and, depending on other factors such as inflation levels, delay even further an increase in Bank Rate.
None of this alters the fact that mortgage rates are highly unlikely to fall from current levels and so longer term fixed rates still offer excellent value for borrowers who don’t mind being locked into early repayment charges for 5, or even 10, years. The risk reward ratio in terms of timing is definitely to act sooner rather than later. The question is not will mortgage rates be higher or lower in 3 months time but will they be at the same level as today or higher.
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