What and indeed where next for bond markets?

The credit crunch era has brought bond markets towards the centre stage of economics and finance. Before then there were rare expressions of interest in either a crisis or if the media wanted to film a response to an economic data release. You see equities trade rarely but bonds a lot so they filmed us instead and claimed we were equities trades so sorry for my part in any deception! Where things changed was when central banks released that lowering short-term interest-rates ( Bank Rate in the UK) was not the only game in town and that it was not having the effect that they hoped and planned. Also the Ivory Towers style assumption that short-term interest-rates move long-term ones went the way of so many of their assumptions straight to the recycling bin.


It is easy to forget now what a big deal this was as the Federal Reserve and the Bank of England joined the Bank of Japan in buying government bonds or Quantitative Easing ( QE). There is a familiar factor in that what was supposed to be a temporary measure has now become a permanent feature of the economic landscape. As for example the holdings of the Bank of England stretch to 2068 with no current plan to reverse any of it and instead keeping the total at £435 billion by reinvesting maturities. Indeed on Friday it released this on social media.

Should quantitative easing become part of the conventional monetary policy toolkit?

The Author Richard Harrison may be in line for promotion after this.

Though the model does not support the idea that central banks should maintain permanently large balance sheets, it does suggest that we may see more quantitative easing in the future.

So here is a change for bond markets which is that QE will be permanent as so far there has been little or no interest in unwinding it. Even the US Federal Reserve which to be fair is doing some unwinding is doing so with baby steps or the complete opposite of the way it charged in to increase QE.

Along the way other central banks joined in most noticeably the European Central Bank. It had previously indulged in some QE via its purchases of Southern European bonds and covered ( bank mortgage) bonds but of course it then went into the major game. In spite of the fact that the Euro area economy is having a rather good 2017 it is still at it to the order of 60 billion Euros a month albeit that halves next year. So we are a long way away from it stopping let alone reversing. If we look at one of the countries dragged along by the Euro into the QE adventure we see that even annual economic growth of 3.1% does not seem to be enough for a change of course. From Reuters.

Riksbank’s Ohlsson: Too Early To Make MonPol Less Expansionary

If 3.1% economic growth is “too early” then the clear and present danger is that Sweden goes into the next downturn with QE ongoing ( and maybe negative interest-rates too). One consequence that seems likely is that they will run out of bonds to buy as not everyone wants to sell to the central bank.

Whilst we may think that QE is in modern parlance “like so over” in fact on a net basis it is still growing and only last month a new player came with its glass to the punch bowl.

In addition, the Magyar Nemzeti Bank will launch a targeted programme aimed at purchasing mortgage bonds with maturities of three years or more. Both programmes will also contribute to an increase in the share of loans with long periods of interest rate fixation.

Okay so Hungary is in the club albeit via mortgage bond purchases which can be a sort of win double for central banks as it boosts “the precious” ( banks) and via yield substitution implicitly boosts the government bond market too. But we learn something by looking at the economic situation according to the MNB.

The Hungarian economy grew by 3.6 percent in the third quarter of 2017…….The Monetary Council expects annual economic growth of 3.6 percent in 2017 and stable growth of between 3-4 percent over the coming years. The Bank’s and the Government’s stimulating measures contribute substantially to economic growth.

We are now seeing procyclical policy where economies are stimulated by monetary policy in a boom. In particular central banks continue with very large balance sheets full of government and other bonds and in net terms they are still buyers.

The bond vigilantes

They have been beaten back and as we observe the situation above we see why. Many of the scenarios where they are in play and bond yields rise substantially have been taken away for now at least by the central banks. There can be rises in bond yields in individual countries as we see for example in the Turkish crisis or Venezuela but the scale of the crisis needs to be larger and these days countries are picked off individually rather than collectively.

At the moment there are grounds for the bond yield rises to be in play in the Euro area with growth solid but of course the ECB is in play and in fact yesterday brought news of exactly the reverse.


A flat yield curve?

The consequence of central banks continuing with what the Bank of Japan calls “yield curve control” has led to comments like this. From the Financial Times yesterday.

Selling of shorter-dated Treasuries pushed the US yield curve to its flattest level since 2007 on Tuesday. The difference between the yields on two-year Treasury notes and 10-year Treasury bonds dropped below 55 basis points in afternoon trading in New York. While the 10-year Treasury was little changed, prices of two-year notes fell for the second consecutive day. The two-year Treasury yield, which moves inversely to the note’s price, has climbed 64 basis points this year to 1.83 per cent.

If we look long the yield curve the numbers are getting more and more similar ironically taking us back to the “one interest-rate” idea the central banks and Ivory Towers came into the credit crunch with. With the US 2 year yield at 1.8% and the 30 year at 2.71% there is not much of a gap.

Why does something which may seem arcane matter? Well the FT explains and the emphasis is mine.

It marks a pronounced “flattening” of the yield curve, with investors receiving decreasing returns for holding longer-dated bonds compared to shorter-dated notes — typically a harbinger of economic recession.


We have seen phases of falls in bond prices and rises in yield. For example the election of President Trump was one. But once they pass we are left wondering if the around thirty year trend for lower bond yields is still in play and we are heading for 0% ( ZIRP) or the icy cold waters of negativity ( NIRP)? On that road the idea that the current yield curve shape points to a recession gets kicked into touch as Goodhart’s Law or if you prefer the Lucas Critique comes into play. But things are now so mixed up that a recession might actually be on its way after all we are due one.

For yields to rise again on any meaningful scale there will have to be some form of calamity for the central banks. This is because QE is like a drug for so many areas. One clear one is the automotive sector I looked at yesterday but governments are addicted to paying low yields as are those with mortgages. On that road they cannot let go until they are forced to. Thus the low bond yields we see right now are a short-term success which central banks can claim but set us on the road to a type of junkie culture long-term failure. Or in my country this being proclaimed as success.

“Since 1995 the value of land has increased more than fivefold, making it our most valuable asset. At £5 trillion, it accounts for just over half of the total net worth of the UK at end-2016. At over £800 billion, the rise in the nation’s total net worth is the largest annual increase on record.”

Of course this is merely triumphalism for higher house prices in another form. As ever those without are excluded from the party.




The UK housing market looks ever more dysfunctional

Today has opened with some more news on the UK housing market so let us take a look at one perspective on it from The Express newspaper.

Britain’s property market booming as house prices hit record highs
BRITAIN’S property market is booming with house prices hitting a record high – and sales at their highest level for a decade, figures show today…..
Rightmove’s director and housing market analyst Miles Shipside said: “High buyer demand in most parts of the country has helped to propel the price of newly marketed property to record highs. There are signs of a strong spring market with the number of sales agreed achieved at this time of year being the highest since 2007.”

It is hard to know what to say about this bit.

Experts last night hailed the bricks-and-mortar bonanza as a key marker of the nation’s prosperity as we head towards the General Election.

What were the numbers?

Let us first remind ourselves that the Rightmove survey is based on asking rather than actual sale prices and then take a look via Estate Agent Today.

The price of property coming to the market has hit anoher record high, up 1.1 per cent over the past month according to Rightmove.

The increase is equivalent to £3,547 and takes the average asking price for homes new to the market to £313,655, exceeding the previous high of £310,471 set in June 2016.

The £3,547 in a month is of course much more than the average person earns although if we look back we see that it is lower than last year as Rightmove points out.

This month’s 1.1 per cent rise is also weaker than the average 1.6 per cent spring-boosted surge of the last seven years.

Why might that be?

“Strong buyer activity this month has led to 10 per cent higher numbers of sales agreed than in the same period in 2016. This large year-on-year disparity should be viewed cautiously as the comparable timespan in 2016 saw a drop in buy to let activity with the additional second home stamp duty” says Shipside ( of Rightmove)

Actually the year on year rate of increase has fallen to 2.2% although as pointed out earlier first-time buyers are facing a 6.5% rise. The idea that house price growth is fading is one of my 2017 themes and adds to this from the listings website Home earlier this month.

Overall, the website claims price rises are much more subdued this year than last. In April 2016 the annualised rate of increase of home prices was 7.5 per cent; today the same measure is just 3.0 per cent.


Here asking prices are falling according to Rightmove.

The price of property coming to market in Greater London is now an average of 1.5% cheaper than this time a year ago, a rate of fall not seen since May 2009. The fall is mainly driven by Inner London, down by 4.2% (-£35,504), while Outer London is up 1.7% (+£9,017). Since last month, asking prices in both Inner and Outer London have fallen, though again it is Inner London with a monthly fall of 3.6% that is dragging the overall average down. Outer London remains broadly flat, down 0.2% (-£1,177) on the month.

The prices of larger houses are seeing a drop.

The fall of 11.9% this month reflects volatility in one month’s figures in a smaller section of the market, but the annual rate of fall of 7.3% is a more reliable longer-term indicator of the challenges that this sector is facing.

but first-time buyers seem to be in the opposite situation.

Typical first-time buyer properties (two bedroom or fewer) are both up for the month (+1.3%) and for the year (+0.5%).

Perhaps the house price forecasts of former Chancellor George Osborne were for the sort of houses he and his friends live in.

However before I move on we do learn something from these asking prices but as Henry Pryor shows they seem to be a long way from actual sale prices.

Record lows for UK mortgage rates

There was this from Sky News on Friday.

A building society is launching Britain’s cheapest ever mortgage deal with a rate of 0.89% as competition between lenders intensifies.

The two-year deal offered by Yorkshire Building Society requires a deposit worth at least 35% of the value of the property. There is also a product fee of £1,495……Moneyfacts said the 0.89% rate was the lowest on its records going back to 1988.

This is a variable rate and a little care is needed as whilst it is an ex ante record it is not an ex post one. What I mean by that is that there were rates fixed to the Bank of England Bank Rate which ended up below this as it slashed interest-rates in response to the credit crunch. One from Cheltenham and Gloucester actually went very slightly negative.

The Mail Online seems to be expecting even more.

Experts say lenders are so desperate for business that rates could fall to as low as 0.5 per cent……..Santander’s cuts are expected to trigger an all-out price war, and deals will be slashed over the next fortnight as the big names fight for business.

Santander has not actually cut yet and we will have to wait until tomorrow. If we look back the record low for a five-year fixed rate mortgage of 1.29% from Atom Bank lasted for about a week before the supply was all taken.

These mortgage rates have been driven by the policies of the Bank of England when it decided in the summer of 2013 that a Bank Rate of 0.5% and QE bond purchases were not enough. It began the Funding for ( Mortgage) Lending Scheme which has now morphed into the £55 billion Term Funding Scheme.  Thus banks do not need to compete for savers deposits leading to ever lower savings rates and they can offer ever cheaper mortgages. This is the reality regardless of the Forward Guidance given by Michael Saunders of the Bank of England on Friday. He gave vague hints of a possible Bank Rate rise, how did that work out last time? Oh yes they ended up cutting it!

Throughout this period we have been told that this is to benefit business lending so what happened to terms for it in February?

Effective rates on SMEs new loans increased by 11 basis points to 3.22% this month.

Also there was more financial repression for savers.

Effective rates on Individuals new fixed-rate bonds fixed 1-2 years fell by 19 basis points to 0.85%


The official view on the UK house price boom is that it has led to economic growth and greater prosperity. However that is for some as those who sell tale profits and of course there is some building related work. But for many it is simply inflation as they see unaffordable house prices and also rents. So there is a particular irony in some of the media cheerleading for higher prices for first time-buyers. With real wages now stagnating and likely to dip again how can they face rises in prices which are already at all-time highs.

The dysfunctional housing market seems to have some very unpleasant consequences foe those left out as the BBC reported earlier this month.

Young, vulnerable people are being targeted with online classified adverts offering accommodation in exchange for sex, a BBC investigation has found…….Adverts seen by BBC South East included one posted by a Maidstone man asking for a woman to move in and pretend to be his girlfriend, another publicising a double room available in Rochester in exchange for “services” and one in Brighton targeting younger men.

Rising bond yields are feeding into the real economy

Once upon a time most people saw central banks as organisations which raised interest-rates to slow inflation and/or an economy and cut them to have the reverse effect. Such simple times! Well for those who were not actually working in bond markets anyway. The credit crunch changed things in various ways firstly because we saw so many interest-rate cuts ( approximately 700 I believe now) but also because central bankers ran out of road. What I mean by that is the advent of ZIRP or near 0% interest-rates was not enough for some who plunged into the icy cold waters of negative interest-rates. This has posed all sorts of problems of which one is credibility as for example Bank of England Governor Mark Carney told us the “lower bound” for UK Bank Rate was 0.5% then later cut to 0.25%!

If all that had worked we would not be where we are and we would not have seen central banks singing along with Huey Lewis and the News.

I want a new drug
One that won’t make me sick
One that won’t make me crash my car
Or make me feel three feet thick

This of course was QE (Quantitative Easing) style policies which became increasingly the policy option of choice for central banks because of a change. This is because the official interest-rate is a short-term one usually for overnight interest-rates so 24 hours if you like. As central banks mostly now meet 8 times a year you can consider it lasts for a month and a bit but in the interest-rate environment that changes little as you see there are a whole world of interest-rates unaffected by that. Pre credit crunch they mostly but not always moved with the official rate afterwards the effect faded. So central banks moved to affect them more directly as lowering longer-term interest-rates reduces the price of fixed-rate mortgages and business loans or at least it should. Also much less badged by central bankers buying sovereign bonds to do so makes government borrowing cheaper and therefore makes the “independent” central bank rather popular with politicians.

That was then and this is now

Whilst there is still a lot of QE going on we are seeing ch-ch-changes even in official policy as for example from the US Federal Reserve which has raised interest-rates twice and this morning this from China.

Chinese press reports that the PBoC have raised interest rate on one-year MLF loans by 10bps to 3.1% ( @SigmaSqwauk)

The Chinese bond market future fell a point to below 96 on the news which raised a wry smile at a bond market future below 100 ( which used to be very common) but indicated higher bond yields. These are becoming more common albeit with ebbs and flows and are on that road because of the return of inflation. So many countries got a reminder of this in December as we have noted as there were pick-ups in the level of annual inflation and projecting that forwards leaves current yields looking a bit less than thin. Or to put it another way all the central bank bond-buying has created a false market for sovereign and in other cases corporate bonds.

The UK

Back on the 14th of June last year I expressed my fears for the UK Gilt market.

There is much to consider as we note that inflation expectations and bond yields are two trains running in opposite directions on the same track.

In the meantime we have had the EU leave vote and an extra £60 billion of Bank of England QE of which we will see some £1 billion this afternoon. This drove the ten-year Gilt yield to near 0.5%. Hooray for the “Sledgehammer” of Andy Haldane and Mark Carney? Er no because in chart terms they have left UK taxpayers on an island that now looks far away as markets have concentrated more on thoughts like this one from the 14th of October last year.

Now if we add to this the extra 1.5% of annual inflation I expect as the impact of the lower UK Pound £ then even the new higher yields look rather crackpot.

In spite of the “Sledgehammer” which was designed by Bank of England lifer Andy Haldane the UK ten-year Gilt yield is at 1.44% so higher than it was before the EU leave vote whilst his ammunition locker is nearly empty. So he has driven the UK Gilt market like the Duke of York used to drill his men. I do hope he will be pressed on the economic effects of this and in the real world please not on his Ivory Tower spreadsheet.

The Grand old Duke of York he had ten thousand men
He marched them up to the top of the hill
And he marched them down again.
When they were up, they were up
And when they were down, they were down
And when they were only halfway up
They were neither up nor down.

If you look at inflation trends the Gilt yield remains too low. Oh and do not forget the £20 billion added to the National Debt  by the Term Funding Scheme of the Bank of England.

Euro area

In spite of all the efforts of Mario Draghi and his bond-buyers we have seen rising yields here too and falling prices. Even the perceived safe-haven of German bonds is feeling the winds of change.

in danger of taking out Dec spike highs in yield of 0.456% (10yr cash) ( @MontyLaw)

We of course gain some perspective but noting that even after price falls the yield feared is only 0.456%! However it is higher and as we look elsewhere in the Euro area we do start to see yield levels which are becoming material. Maybe not yet in Italy where the ten-year yield has risen to 2.06% but the 4% of Portugal will be a continuous itch for a country with such a high national debt to GDP (Gross Domestic Product) ratio. It has been around 4% for a while now which is an issue as these things take time to impact and I note this which is odd for a country that the IMF is supposed to have left.



The US

The election of President Trump had an immediate effect on the US bond market as I pointed out at the time.

There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.


As I type this we get a clear idea of the trend this has been in play overall by noting that the long bond yield is now 3.06%.  We can now shift to an economic effect of this by noting that the US 30 year mortgage-rate is now 4.06% and has been rising since late September when in dipped into the low 3.3s%. So there will be a contractionary economic effect via higher mortgage and remortgage costs. There will be others too but this is the clearest cause and effect link and will be seen in other places around the world.


Here we have a slightly different situation as the Bank of Japan has promised to keep the ten-year yield around 0% so you can take today’s 0.07% as either success or failure. In general bond yields have nudged higher but the truth is that the Bank of Japan so dominates this market it is hard to say what it tells us apart from what The Tokyo Whale wants it too. Also the inflation situation is different as Japan remains at around 0%.


We find ourselves observing a changing landscape. Whilst not quite a return of the bond vigilantes the band does strike up an occasional tune. When it plays it is mostly humming along to the return of consumer inflation which of course has mostly be driven by the end of the fall in the crude oil price and indeed its rebound. What that has done is made inflation adjusted or real yields look very negative indeed. Whilst Ivory Tower spreadsheets may smile the problem is finding investors willing to buy this as we see markets at the wrong price and yield. Unless central banks are willing to buy bond markets in their entirety then yields will ebb and flow but the trend seems set to be higher and in some cases much higher. For example German bunds have “safe-haven” status but how does a yield of 0.44% for a ten-year bond go with a central bank expecting inflation to go above 2% as the Bundesbank informed us earlier this week?

The economic effects of this will be felt in mortgage,business and other borrowing rates. This will include governments many of whom have got used to cheap and indeed ultra-cheap credit.




The consequences of rising UK Gilt yields on fiscal policy,pensions and mortgages

Today I wish to cover several trends of these times as they have all come together in one market. That is the UK Gilt market which is the name for UK government bonds. This is currently being influenced by quite a few factors at once but let me open with the two main factors which brought it to extraordinarily high levels in price terms and low levels in yield terms. The first is illustrated by this from Kenneth Rogoff in the Financial Times.

The mixed results from experiments with negative interest rate policy in Europe and Japan have led many to conclude that the idea is ill begotten and should be abandoned. To do so would be a serious mistake.

As you can see given a choice between reality and the view inside his Ivory Tower he much prefers the latter. This establishment view has driven interest-rates and bond yields lower around much of the world. Added to this in the UK has come the extra £60 billion of QE (Quantitative Easing) purchases of UK Gilts announced by the Bank of England in early August. Today will see it attempt to buy some £1.17 billion of long and ultra long UK Gilts as it buys ones maturing between 2032 and 2068.

A Reversal In Yields

Back in the 12 th of September I pointed out that the benchmark UK ten-year Gilt had a yield which had risen from the 0.5% it had fallen to up to 0.88%. This week it has pushed back up above 1% (1.01%  as I type this) which meant that yesterday the Bank of England found itself buying some of our 2023 Gilt at a yield some 0.25% higher than the week before. That is a lot on a yield which was 0.38%! I will be checking later what they pay for our longest dated Gilt and how that compares to the 198 they have paid to get a scale of a program which in its recent incarnation is running at a marked to market loss.

If we look for the yield most relevant to fiscal policy the thirty-year has risen to 1.7% (low 1.19%) and for fixed-rate mortgages the five-year has risen to 0.4% from a low of 0.12%.

What has caused this?


Markets seem to have suddenly realised that inflation is going to go higher as this from the Financial Times indicates.

As a result, market expectations of UK inflation measured by the five-year break-even swap rate have jumped to 3.6 per cent — the highest level since early 2013.

Regular readers will be aware that I was expecting a rise in UK inflation as 2016 heads to a close anyway and it would have been enough to make even the new five-year yield look silly in real terms. It would also question the ten and thirty year yields. Now if we add to this the extra 1.5% of annual inflation I expect as the impact of the lower UK Pound £ then even the new higher yields look rather crackpot. Over as far ahead as we can see then we are expecting inflation adjusted or real yields to be strongly negative. Accordingly the UK Gilt market has been singing along to the Nutty Boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain

Why have they done this? This is another theme of these times as they are simply front-running the Monday, Tuesday and Wednesday purchases of the Bank of England. This manipulation of the market by it means that all the old rules for pricing Gilts have been both broken and ignore or if we are less polite a false market has been created.

Fiscal Policy

The impression that the UK government will loosen fiscal policy has gained ground and this has two components. The first is that it seems likely to spend more than the previous administration in a like for like comparison and secondly there is the impact of releases like this from the UK Treasury. This has had an impact today although it is in fact the same one released several months ago.

Cabinet ministers are being warned that the Treasury could lose up to £66 billion a year in tax revenues under a “hard Brexit”, according to leaked government papers.

GDP could fall by as much as 9.5 per cent if Britain leaves the single market and has to rely on World Trade Organisation rules for trading with the continent, compared with if it stayed within the EU, the forecasts show.

So those with short memories will be made nervous by the “scoop” in the Times. I do not know if the expected 18% fall in house prices is still in it as well.

The wider picture

We are seeing a global move towards higher yields and as an example we even now have a positive yield for ten-year German bunds albeit one of a mere 0.06%. The US 10 year Treasury yield has risen to 1.76% on the back of stories like this from Bloomberg.

Pacific Investment Management Co. says the Federal Reserve may raise interest rates two or three times by the end of 2017. Treasuries tumbled after oil prices rose.

Are those the ones that have not taken place so far in 2016? Also it is hard not to have a wry smile at the statement by Pimco that UK Gilts were on a “bed of nitroglycerine” which preceded one of the strongest rallies in history.

Not everybody is upset by this

If we move to the world of pension deficits then quite a few UK companies may welcome higher Gilt yields. This has been illustrated by this news today from Pensions World.

The aggregate deficit of the 5,945 schemes in the Pension Protection Fund (PPF) 7800 Index has decreased to £419.7bn at the end of September 2016, from a deficit of £459.4bn at the end of August 2016.

So £40 billion less to find which even in these inflated times is still a tidy sum. For those of you who would like to know the total sums at play, here they are.

Total assets were £1,449.5bn and total liabilities were £1,869.3bn. There were 4,993 schemes in deficit and 952 schemes in surplus.


Let us take a dose of perspective. If I look back over my career I can recall longer Gilt yields being 15% and more so 1.7% remains extraordinarily low and we should take advantage of it if only to improve the cost of our stock of Gilts. On that basis the recent rise is small but it also shows that we should not dilly and dally forever as events move on.

However there is another case of a false market here and it is one created in inflation-linked Gilts. They should be rising as inflation forecasts rise but whilst they are not part of the QE program their price has been driven higher by it as they are closely linked to ordinary or conventional Gilts. So we face the prospect of another false market as it is possible that higher inflation could be accompanied by lower prices for index-linked Gilts. Mind you I see that the new boy at the Bank of England is getting in his excuses early. From @LiveSquawk.

BoE’s Saunders: Expects MPC To Tolerate Modest Currency-Driven Inflation Overshoot In Next 2-3 Years

I wonder what “modest” is?

BoE’s Saunders: Expects GBP Weakness To Lift Inflation ‘Quite Substantially’

Oh and we see a clear sign of one of Carney’s cronies as we see a breathtaking attempt to shift the blame for the consequences of QE.

Saunders: Government Has Many More Tools To Resolve Distributional Effects Of Monetary Policy Than BoE




Are mortgage rates in Denmark part of a “mad world”?

This morning has started with a familiar drum beat for these times as we see higher bond prices in Japan and the consequent record lows in yields.

The 10-year JGB yield edged down half a basis point to minus 0.160 percent, after earlier setting a record low of minus 0.165 percent…..The 20-year JGB yield also set a fresh record low of 0.180 percent, shedding 1.5 basis points, as did the 5-year yield, dropping half a basis point to minus 0.275 percent .

As prices are going “higher and higher” and yields “Fallin’ ” we are now seeing consequences for the ordinary man and woman and the obvious place to look for this is Denmark. You see it has the longest history of official negative interest-rates with the certificate of deposit rate being cut to -0.2% on the 6th of July 2012 and being -0.65% as I type this. So we about to see four years tick up albeit with a brief spell in 2014 when the rate was raised to the apparent heights of 0.05%. Oh how the Nationalbanken must wish it could erase evidence of that move! As it was wrong footed by a policy change at the European Central Bank with more deception than any player I have seen so far at the 2016 European championships.

Such a thing is especially troubling as we mull how many central banks have started tightening cycles only to find that they cut again and in Denmark’s case to record lows. Although right now it is at -0.65% so just above the nadir of -0.75%. That is quite a contrast to the “expert” view which has had a consensus that negative interest-rates were not going to last long.

Mortgage Rates

This is one of the ways we can investigate the impact on the ordinary Dane and there are new developments in this arena.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

As you can see the Danish mortgage borrower can borrow as cheaply as the US Government and if the coupon drops to 2% well they can borrow more cheaply than the UK government over a 30 year period. So the ordinary borrower has the potential to lock in very low levels for mortgage-rates over a 30 year period in which case this particular shadow of the credit crunch era will stretch to at least 2046.  From the way the article is written 2% seems not far off a done deal if 1.5% is also in prospect,although the later feels subject to some hype.

As to whether the Danes will respond well the answer seems to be yes if last year was any guide.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float……Fixed-rate loans now make up about a third of Danish mortgage lending.

Oh and as to the below isn’t everything these days? The emphasis is mine.

The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

I do not know about you but the statement below seems to be rather tempting fate.

What’s more, borrowers can’t walk away from their debt.

Negative Mortgage Rates

There has been a lot of speculation and hype about this but the Danish Mortgage Bank Association keeps a weekly record of the yields on Danish mortgage bonds. The short-term rate for Kroner mortgage bonds was last at -0.23% and has been negative for all but two weeks in 2016. If we move to Euro mortgage bonds as we recall the Krone is pegged to the Euro then the yield on short-term mortgage bonds was last -0.13% and it has been negative for all of 2016 so far.

Back in April the Wall Street Journal was on the case.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

If only his name had been Hans Christian Anderson…

House Prices Rise

Even the IMF is on the case.

Fueled by historically-low interest rates, house prices have risen rapidly in recent periods—especially for flats and in Copenhagen……..the market bears close watching since a continuation of the uptrend would soon bring real house prices in these segments back to pre-crisis levels.

The data is delayed but the owner occupied flat index was up 9.2% in the year to March. The Nationalbanken suggests that the only way is up baby.

expectations of further positive developments in the housing market.

First-time buyers will of course have reason to disagree.

The debt problem

The IMF tried to sweep this issue under its carpet.

and the absence of an attendant rapid build-up in household debt.

That seems fine except if we note this from the Danish mortgage association.

The market value of all Danish outstanding mortgage bonds (traditional mortgage bonds, covered bonds and covered mortgage bonds) exceeds DKK 2,300bn (app. EUR 310bn). The Danish mortgage bond market is actually more than four times larger than the Danish government bond market. The market value also exceeds total Danish GDP.

Sadly it is out of date in terms of data however i helped out a bit on August 24th last year.

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…


There is much to consider here but whilst the mainstream media continues of course to blame this on the Brexit referendum there is a culprit even closer to home. The Nationalbanken pegs the Krone to the Euro which means that Danish securities and an extremely close proxy for Euro area ones whilst the peg holds. The consensus view on the peg  is given by Bloomberg.

The man running Denmark’s biggest pension fund is convinced nothing can break the country’s euro peg.

This means that the 172.2 billion Euros of the third phase of the ECB’s covered bond purchases will have a strong effect on Danish covered bond prices and yields too. Odd that this is missed and of course there will also be an impact from the new corporate bond program which is doing this today.

ECB out again this morning buying more short end autos, 2-3y Chem names & 7-10y Pharma names (@creditmacro )

What could go wrong?

Also with the strong influence of the housing market on the economy of Denmark you might think that the economy would be surging, certainly economics 101 tells us that. But the last 3 quarter have gone -0.6%, 0.1% and then 0.5% so an improving trend yes but just under flat overall. If we look bank the Nationalbanken notes a credit crunch era of relative underperformance.

The low rate of growth in Denmark is to a large extent attributable to weak domestic demand.

On the other side of the coin Denmark does have substantial pension fund assets. How are they going though in a negative interest-rate world…..

Time for Tears For Fears or more recently Gary Jules.

When people run in circles it’s a very very
Mad world
Mad world
Mad world
Mad world




The Bank of England has squeezed disposable income by inflating housing costs

One of the features of that last 3 years or so in the UK has been the way that house prices have accelerated and left wage growth especially real wage growth way behind. The official view is that affordability is fine because mortgage rates have fallen although of course that is something of a trap as if the tactic of raising house prices is to continue then mortgage rates will have to continue to fall. That is not so easy from what are often particularly in the case of fixed-rate mortgages all time lows for rates. Also the idea that affordability is good is undermined by the fact that some much official “Help” is required via Help To Buy and other schemes. The truth is of course that first time buyers are very likely to be humming the words of John Lennon.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

A Different Perspective

The Resolution Foundation has taken a look at some longer time patterns at they pose another challenge to the its okay crew.

The analysis, which forms part of the Foundation’s forthcoming housing audit, finds that the share of income spent on housing costs was stable for most of the 1990s and early 2000s at around 17 per cent. However, a wedge opened up in the mid-2000s as rising housing costs outstripped income growth. By the eve of the financial crash, the average working age household spent around a fifth of their income on housing.

A 3% income share may not seem much but if one considers where that 3% has to come from then it gets much more difficult for many if not most budgets. Actually the impact of the credit crunch or rather the Bank of England Bank Rate cuts handed it back for a while.

This housing affordability wedge then shrank in the wake of the crash as interest rates were cut to record lows and house prices fell. For many households this fall helped soften the post-crash living standards squeeze by reducing mortgage costs.

Ah house prices fell! What a chill that will send around officialdom and the Bank of England as departmental memos fly around to explain what a house price fall is. In true Question of Sport form you are all probably wondering what happened next?

However with rising housing costs once again outstripping income growth, the Foundation warns that housing risks being a major brake on the UK’s living standards recovery.

The Foundation notes that the extra share of income being spent on housing over the last 20 years – up from 17 per cent in 1995 to 21 per cent in 2015 – is equivalent to a 10p rise in the basic rate of tax (or £1,500 per year) for a typical dual-earning couple with a child.

So we see that in percentage of income terms we are now pretty much back to the 2008 peak which makes you think. It is eye-catching to note that this is equivalent to a 10 pence rise in the basic tax rate. This was 25% back then if we ignore the lower rate of 20% on £3000k or so of income) so we have been given a basic income tax rate  5% lower but house buyers have found twice as much taken away. Oh Well as Fleetwood Mac put it. Of course the personal allowance has changed but even so the theme is clear here.

The Squeezed Middle

Is looking rather squeezed to say the least.

The analysis shows that households on low and middle incomes have been most affected by housing costs growing faster than incomes. Among these households, the share of income spent on housing has increased by almost a half over the last 20 years, from 18 per cent to 26 per cent. A far smaller increase took place for higher income households (up from 14 to 18 per cent) and the poorest households (up from 21 to 25 per cent).

We can perhaps gain a little solace from the fact that at least the poorest have not been hardest hit. But of course that ignores what 25% of their income actually gets them as we mull the pictures of rooms that seem more like cupboards that have done the rounds.

Regional Inequality

Maybe it’s because I’m a Londoner that these figures resonate but Scots have been hit by a shift here as well. The emphasis is mine.

Londoners currently spend around 28 per cent of the income on housing costs, up a third since the mid-1990s (21 per cent). Recent increases in housing costs have caused typical London households to experience the biggest post-crash fall in disposable incomes anywhere in the UK.

Scotland has seen the second sharpest increase (up from 12 per cent to 18 per cent), followed closely by the North West (up from 15 per cent to 20 per cent).

So the recovery has yet to reach disposable incomes in London? it is something of an antidote to all the “hoorah for house price rises” headlines that the media so love, after all they will be liked by one of the main advertising sectors.

Some Are Even Worse Off

Averages of course give us only some idea of the distribution and can by got by different routs and roads so this helps to nail the picture on the wall.

The Foundation warns that these increases have pushed too many households into spending a perilously high share of their income on housing. Its analysis shows that around 3.3 million households spend at least a third of their income on housing costs – up from 1.6 million in the mid-1990s.

I note that the Resolution Foundation then hammer out a beat that has been familiar to readers of my work for some time to say the least.

The analysis published today shows that private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent).

Whilst one needs to be careful about generics and stereotypes this is more of a problem for younger people than older ones as we mull the concept of a generational war.


There is much to consider here and let me open with the fact that this has been a deliberate policy driven by the Bank of England. In the summer of 2012 its Funding for Lending Scheme gave banks a subsidy ostensibly for small business lending but the real impact was via an initial impact of a 0.9% fall in mortgage rates. It’s own research suggests a total impact of 2% on mortgage rates. Whilst this did make houses more affordable for a while the subsequent surge in house prices first eroded and then according to the Resolution Foundation eliminated that on the road to making housing costs higher.

I would like to look at disposable income which is being squeezed according to this analysis by a consequence of Bank of England policy. If we go back to 2010/11 then real wages slumped in response to the Bank of England overlooking a rise in consumer inflation to over 5% per annum. Please remember that when the many “experts” tell you that such moves provided a strong stimulus as whilst it did up in the economic models to be found in Ivory Towers if we come back below the clouds it faded away.  If we put house prices in our inflation measures then some of the growth would disappear.

The situation was worse around the time of the Lawson boom in the late 1980s when around a quarter of disposable income went on housing but there are two catches. Firstly interest-rates were in double figures and on their way to a 15% peak if I recall correctly with apologies to younger readers for such a mind bending number. Secondly what happened next?




The Bank of England faces the consequences of pumping up Buy To Let lending

One of the features of central banking policy in the credit crunch era is that they have an asymmetric response pattern. They are ready to ease almost at the drop of a hat and at time even plunge us into negative interest-rates and yields. Yet on the other side of the coin they are slow to tighten policy or as we saw in the UK as inflation pushed to above 5% in 2011 sometimes do not tighten at all. In other words they are prone at best to doing too little to late. Even the US Federal Reserve which has begun a tightening cycle is proceeding slowly and is well behind the curve unless you believe that oil and commodity prices will continue to fall.

If we look at the UK the Bank of England has left official  interest-rates unchanged for over 7 years now. Its major effort has come via both QE and the Funding for Lending Scheme which helped both banks and the housing sector. I discuss that in more detail below. But I note that for all the hype about it acting it is even behind the government which has announced both Stamp Duty and Income Tax changes. Was not one of the points og having a committee of technocrats that they were supposed to act more quickly and decisively than politicians?

Also if we move to the Financial Planning Committee was it not created  for this sort of thing? Is all the expense of this particular Quango merely so it can use the word “vigilant” and then go to lunch. If we omit Governor Carney can anybody name a member of it? I can only because I used to work with Dame Clare Furse. I noted a while back when I retweeted a speech of hers for old times sake that it did not create much of a splash. Next time I decided not to so I could see if anybody else did and as far as I can tell nobody did. The musical reference has to be “The Sound of Silence” by Paul Simon.

Buy To Let Lending in the UK

An example of this has been the boom in UK Buy To Let lending which has help drive house prices out of the reach of first-time buyers in much of the UK. On Thursday the British Bankers Association published the latest figures.

Mortgage borrowing remained buoyant in February. It appears that borrowers are continuing to try to get ahead of the increases in stamp duty for buy-to-let and second home buyers scheduled to come into effect next month.

It was not only borrowing which was buoyant.

There were 20% more approvals for house purchase in February than in the same month of 2015. Reports suggest this is, in part, due to buyto-let and second-home buyers…….

Indeed one can make a case for UK credit standards overall being relatively lax if we look at these numbers too.

Unsecured borrowing by households is growing at around 6% per annum reflecting low interest rates and relatively strong household finances.

The BBA likes to rose-tint things as if household finances are so “strong” why do people need to borrow?

If we look back we see that any attempt to roll back on Buy To Let lending has a problem. You see back in the summer of 2012 the Bank of England panicked over the state of the UK housing market and launched the Funding for Lending Scheme. This depressed mortgage rates by up to 2% according to the Bank of England and I noted at the time that the initial effect was to reduce mortgage rates by around 0.9%. Putting it another way monthly bank lending for house purchase mortgages according to the BBA fell to £4.56 billion in July 2012 whereas this February it was £8.45 billion. The total stock of mortgages has risen from £776 billion to £845 billion over the same period. The latter number underrepresents things in my view as some have taken the opportunity of cheap finance to reduce their mortgage borrowings. We do not get enough detail from these numbers but has ordinary mortgage purchases been replaced by buy to let borrowing?

Putting that into affordability can be done by using the average house purchase mortgage size which was £161,100 in July 2012 but is £180,900 now. Wages however have only increased by some 6% leaving them well short of the change. No wonder first-time buyers need so much official “Help” these days leaving them singing along with the Beatles.

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

Actually if you argue that the Funding for Lending Scheme will have taken time to impact then you eyes may alight in the average mortgage of £145,300 in January 2013 given an increase of just under a quarter in a mere 3 years and one month.

Along this road you find that the Bank of England is looking at a Buy To Let lending boom of its own creation. No wonder they have tried their best to “look away now”. They should avoid reading Property Review.

According to new data released by the National Association of Estate Agents, during February, 85% of estate agents saw an increase in the number of buy-to-let investors flooding the market to beat the stamp duty changes on second homes.

Oh and as you peruse the market it is hard to escape the “interest-only” mortgages which we were promised would be persona non grata.

The numbers

It was only on March 18th that I pointed out how Buy To Let in the UK was providing substantial gains.

Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the twelve months to February. This is up from 11.7% in the twelve months to January.

At a time of such low interest-rates and yields elsewhere no wonder people are attracted to this as an investment strategy. It was only yesterday we got more details on the amount of lump sum money taken out of UK pensions since the rules were relaxed ( £3 billion) and you have to wonder where it has gone?

The Daily Telegraph seems to keep plugging this area leading it onto all sorts of unexpected places.

Kellie Maloney: ‘Buy-to-let paid for my £100,000 sex change’


There is more than a certain amount of irony in the same Bank of England which pumped up the Buy To Let boom being responsible for puncturing any bubbles! I am sure that many reading this will be also thinking of the phrase “closing the stable door after the horse has bolted”. Indeed the FPC meeting minutes from November were rather clear.

The limited growth in mortgage lending had continued to be driven by the buy-to-let sector. In the year to 2015 Q3, the stock of buy-to-let lending had risen by 10%, compared to 0.4% for owner-occupiers.

This morning has seen the release of the awaited news on action so what do we get? Here is the Prudential Regulatory Authority.

This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts

This will not end fears that the boom will be over and out before anything happens as this is only a consultation paper. Indeed we even have use of the word “soundness” which was a favourite of the head of the civil service in Yes Minister. Should it ever be applied what will we get?

The PRA is therefore proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract……..Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%.

Oh and those who have wondered about companies doing this will be intrigued by this reference.

The proposals also include clarification regarding application of the small and medium-sized enterprise (SME) supporting factor 1 on buy-to-let mortgages.

Dear Bank of England how much small business lending has been for Buy To Let property?

As to the FPC what will it do?

the FPC remains vigilant to risks in this area.

Perhaps not as vigilant as perusing the tea-trolley or the lunch menu. But along the way we see mention of an issue we have regularly discussed on here but seems to be news to our Quangocrats.

Strong growth of consumer credit, which reached 9% in the year to January 2016, in part reflects increased use of finance secured on the purchase of vehicles.

So it will be “vigilant” “remain alert” and “monitor”. Meanwhile.

The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.