Falling gilt yields are likely to force the cost of fixed-rate mortgages further down, according to analysis from Ray Boulger, senior technical manager at independent mortgage adviser John Charcol.
The main beneficiary of yesterday’s (15 October) equity market volatility has been government bonds, with money seeking safe havens pushing yields lower.
Mr Boulger explained that 2-year gilt yields closed eight basis points down today, while 5-year paper fell by 19 basis points and 10-year gilts were down by 17 basis points.
“Despite the recent sharp fall, two-year yields are still marginally higher than a year ago - 0.04 per cent - 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 per cent, with 10 and 30 year down more than twice as much, by 0.83 per cent and 0.86 per cent respectively, resulting in a significant narrowing of the yield curve.
These moves have been reflected in swap rates, a key factor in lenders’ cost of funds when pricing fixed rates mortgages.
Mr Boulger gave the example of 5-year swaps closing yesterday at 1.47 per cent, compared with a peak of 2.29 per cent three and a half months ago.
“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.
FTAdviser reported yesterday that Leeds Building Society is set to cut rates on its 5-year fixed mortgages at 80 per cent and 85 per cent loan-to-value, from Friday (17 October).
“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 per cent, which was available nearly two years ago.”
peter.walker@ft.com
