What does the bond market volatility mean for your mortgage?
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Bankruptcy happens gradually, then suddenly, Hemmingway wrote. The sentiment applies to all sorts of financial crises; some, like the Liz Truss saga, have a clear trigger, while others seem to creep up on you.
Whether we've all returned from the Christmas holidays to a bout of volatility or a full blown financial disaster isn't completely clear - we won't know a lot until Donald Trump takes office - but there are reasons to be optimistic.
I wrote a short explainer of what prompted the bond market sell off in Wednesday's note. Developments since have suggested that this is not as serious as the post-mini budget rout of 2022. Indeed, stability appeared to be returning late yesterday: 10-year yields inched down and the 30-year traded flat. UK gilts haven't moved in isolation, either, which is the crucial difference with the Truss saga. Granted, government policy hasn't helped, but the original moves were prompted by a retreat from US government bonds. And though gilt yields have touched multi-decade highs, the moves aren't of the scale likely to trigger something akin to the LDI crisis we saw in 2022. Here is the FT's 'Lex' column:
"The latest sell-off is simply nowhere near as severe. A 0.11 percentage point move in the benchmark 10-year gilt yield in a single day is never a good sign, but equivalent shifts happened seven times in 2024 alone without causing major damage. At its worst point in 2022, the 10-year yield surged more than 0.4 percentage points in a day, and over 1 percentage point in three days."
The mortgage market
The knock-on effects haven't been as severe, either. Markets are, for the time being at least, pricing in two bank rate cuts of 0.25% this year. The five-year interest rate swap was still trading just under 4.5% at lunchtime yesterday. That’s high compared to recent months, but it's a full percentage point lower than it was in late September 2022- Tom Bill will have more on this in his prime central London update due out on Monday.
Mortgage rates will probably move higher, at least in the short term. Some specialist and niche lenders have already repriced - they are funded in a way that leaves them vulnerable to short term moves in swap rates, Simon Gammon of Knight Frank Finance tells the Guardian. The larger lenders can absorb more of that volatility, and indeed they are incentivised to hold rates as low as they can. The new year brings fresh lending targets, and they’ve had a difficult few years in the mortgage market, but unless swap rates ease back we'll probably see a round of repricing, if not today then early next week.
That will squeeze activity and add a little more pressure on house prices. Anything beyond that will depend on whether the outlook changes for the better, both globally and domestically. For now, chancellor Rachel Reeves "has told cabinet colleagues to draft alternative plans to boost growth", according to the Times. She has until March, at which point new OBR forecasts may force her into announcing massive spending cuts or new tax rises.
ESG
BlackRock has become the latest firm to depart an industry climate change group in the wake of Trump's election. The firm announced in a letter to clients yesterday that it had quit the Net Zero Asset Managers group - it follows the decision by Morgan Stanley, Citigroup and Bank of America to quit the Net-Zero Banking Alliance.
BlackRock's statement is interesting because it addresses the politicisation of ESG directly: membership in NZAM had “caused confusion regarding BlackRock’s practices and subjected us to legal inquiries from various public officials”, vice-chair Philipp Hildebrand wrote, according to a copy of the letter seen by the Financial Times.
For a time, it looked like the rise of ESG might upend traditional views what companies are for. Milton Friedman famously said that the primary responsibility of a company is to maximise value for its shareholders, but company leaders have increasingly sought to balance that with their own moral views. That will not be allowed while Trump reigns - Paul Atkins, his pick for head of the Securities and Exchange Commission (SEC), has argued that ESG rules are costly and do little for investors.
Real estate has managed to skirt many of these debates. In banking, funding fossil fuel extraction might in many cases still be the direct route to maximising shareholder value, but regulatory action affecting our sector has more neatly aligned maximising shareholder value with lowering emissions. Owners of buildings without high sustainability ratings at the very least won't capture rental growth, and in the worst case scenarios have stranded assets. The social side of ESG remains less clear cut.
Want more on ESG? Flora Harley has looks at what to expect from the year ahead here. Our experts pick their key, sector-specific trends here.
In other news...
UK consumer confidence falters after Christmas splurge (Reuters).