Boulger: Fixed rates have bottomed out

Gilt yields spiked up sharply yesterday and rose further today. As a result today’s closing rate for five year swaps was 1.75% which is 0.19% higher than the closing rate of 1.56% only six days ago immediately before the MPC provided us with “explicit guidance” and nearly double the all time low of 0.91% only three and a half months ago on 2 May.

Furthermore it is now only 0.10% below the level of 1.85% hit in June before comments from Mervyn King and other MPC members persuaded the market it had overdone the increase in rates.

The market now appears to be reassessing whether its reaction to the earlier MPC comments was justified despite this month’s MPC minutes including the comment that “UK short-term market interest rates remained higher than at the time of the May Inflation Report; and while some rise since May might be justified, most members judged that the extent of the increase remained greater than could be reconciled with the improvement in the economic outlook”.

If the MPC wants to bring rates back down it may have to deliver some action rather than just words!

One other surprising aspect of the MPC minutes published today was that voting for a three year “guidance” period was not unanimous.

Martin Weale thought the guidance period should be shorter on the basis that he thought three years was too long a period for the MPC to be a hostage to fortune.

Although over the last few weeks some fixed rate mortgage changes have been up and others down, this morning Halifax increased the rate on its cheapest 5-year fix from 2.45% to 2.69% albeit coupled with a £500 reduction in the fee to £1,760.

Furthermore Principality Building Society pulled its market leading 5-year fixed rate of 2.99% up to 75% LTV. Rate changes on deals which are market leading, or very close to it, are much more relevant than changes in rates which most people won’t consider applying for!

This all reinforces our recent message for borrowers which is that fixed rates are on the floor and for most people there is little or nothing to be gained by waiting for lower rates.

However for those looking to remortgage increasing property prices, a trend likely to continue for at least two years, will enable some homeowners to benefit from the cheaper rates available at lower LTVs especially if they are on a repayment mortgage and/or overpaying.

Depending on the rate they are currently paying borrowers in this situation may benefit from waiting a short while to enable them to take advantage of the better rates available at lower LTVs.

But this strategy runs the risk that rates will rise before the lower LTV is achieved.”