I thought that I would end this week with a topic that we can look at from many angles. For example the first question asked by the bodies that have dominated this week, central banks, is what will this do to house prices? Well in ordinary times this weeks actions would have quite an impact and I am including in this expectations of future action by the Bank of England and European Central Bank (ECB). For newer readers this is because bond yields and their consequent impact on mortgage rates move these days ahead of policy action and sometimes well ahead. Of course, maybe one day central banks will fail to ease but such beliefs rely on ignoring the history of the credit crunch so far where such events were described rather aptly by Muse with supermassive black hole and monetary tightening was described by Oasis with Definitely Maybe,or perhaps better still by Rod Stewart with I Was Only Joking.
Bond Yields
The world has moved on even since I looked at this yesterday. Perhaps even faster than I suggested it might! Well played to any reader either long bonds or long a bond fund as you have had an excellent 2020. Sadly those on the other side of the balance sheet looking for an annuity are in the reverse situation. Not many places will put it like this but the US Federal Reserve has completely lost control of events this week and has learnt nothing from the mistakes of the Bank of Japan and ECB.
What I mean by this is that the US ten-year yield is now 0.78%. It was only this week that they went below 1% for the first time ever and last week we were looking at it hitting new lows like 1.3%. It started the year at 1.9%. This has been added to by the US Long Bond which has soared overnight reducing the thirty-year yield to 1.36% or 0.21% lower. What this means is that the already much lower US mortgage rates are going much lower still and I would quote some but I am afraid they simply cannot keep up with the bond market surge. Although I do note that Mortgage Daily News is wondering if things will be juiced even more?!
One of them suggested mortgage rates have more room to move lower if the Fed decides to start reinvesting its first $20bln a month of MBS proceeds again (which it currently allows to “roll off” the balance sheet). ( MBS = Mortgage Backed Securities )
As I am typing this events are getting even more extraordinary so let me hand you over to Bloomberg.
U.S. 10-year Treasury yield drops below 0.7%
I have experienced these sort of moves with bond markets falling but cannot recall them ever rallying like this so it is a once in a lifetime move.
You may ask yourself
What is that beautiful house?
You may ask yourself
Where does that highway go to?
And you may ask yourself
Am I right? Am I wrong?
And you may say yourself
“My God! What have I done?” ( Talking Heads )
So I now expect another sharp move lower in US mortgage rates and I expect this to be followed by much of the world. For example in my home country the UK mortgages are mostly fixed-rate these days ( in fact over 90%) so the five-year Gilt yield gives us a marker on what is likely to happen next. It has fallen to 0.14% this morning and so UK mortgages will be seeing more of this from Mortgage Strategy.
Vida Homeloans has announced a series of rate cuts to its residential and buy-to-let mortgage ranges……
Still in the residential range, Vida’s 75 per cent LTV five-year fix has gone down from 5.39 per cent to 4.99 per cent, and its 65 per cent LTV five-year fix from 5.49 per cent to 5.04 per cent.
In the BTL range, the 75 per cent LTV five-year fix has been cut from 4.64 per cent to 4.04 per cent.
I have picked them out because they are specialist lenders for non standard credit. You know the sort of thing we were promised would never happen again. Also we read about turning Japanese but we seem to be turning Italian as payment holidays appear.
Lenders are “ready and able” to offer help to borrowers affected by the Coronavirus outbreak, UK Finance has pledged.
The trade body says this may come in the form of repayment relief to customers whose earnings have been hit or costs increased as a result of contracting the virus or because of the measures imposed to stop it spreading.
It comes after a number of lenders including TSB, Natwest and Saffron Building Society offered payment holidays to borrowers who had been severely affected by recent flooding.
So we can see that this particular tap is as wide open as it has ever been and as we look around the world we can expect similar moves in many places. In terms of exceptions there is one maybe because Germany is returning to previous bond yield lows ( -0.74% for the benchmark ten-year) and via its policy of yield curve control the Bank of Japan is stopping much of this happening. The latter is another in quite a long list of events from the lost decade era in Japan and I am pointing it out for three reasons.The first is that it is raising rather than reducing bond yields as intended. The second is that therefore we will not see a housing market boost. The third is that I am alone in pointing such things out as the “think tanks” continue to laud yield curve control. After all copying Japan has worked so well hasn’t it?
Mortgage Lending
We can also expect a boost from here. There are plenty of rumours of credit easing especially from the ECB as frankly it has few other options. I would expect much trumpeting of this going to smaller businesses but by some unexplained and unexpected event ( except by some financial terrorist writers) it will go straight into the mortgage market. My home country had an example of this with the Funding for Lending Scheme where the counterfactual needed to be applied to business lending bit was not required for mortgage lending. Japan also had a scheme for smaller businesses where large companies immediately set up subsidiaries and claimed.
Comment
So far I have given these for those expecting a house price rally.
Reasons to be cheerful, part three
1, 2, 3 ( Ian Dury)
For newer readers this is not something I welcome as it is inflation for first-time buyers.
Now let me look at the other side of the coin and there are two main factors. The first is what John Maynard Keynes called “animal spirits” or the film Return to the Forbidden Planet called “monsters of the id”. With worries about jobs and quarantine will people be willing to buy? That may lead to a lagged effect as people refinance now and buy at a later date.
The next is mortgage supply. Whilst the official taps are opening and they are building new pipes as I type there will be some banks and financial institutions that will be under pressure here and thus will not be able to lend. Some we can figure out but other are unpredictable and let me give you a symbol of a big stress factor right now, Yesterday’s 14 day Repo saw around US $70 billion of demand and only US $20 billion was supplied. So dollars are in short supply somewhere and frankly the US Federal Reserve policy of reducing Repo sizes looks pretty stupid.