Introduction: Mortgage rates set to rise as swaps hit three-year high
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Mortgage borrowers are being warned that borrowing rates are set to rise, as this week’s global bond sell-off ripples through the economy.
Although the turmoil in the bond markets has cooled – for now, at least – the consequences of the jump in bond yields could be serious for borrowers.
That’s because UK swap rates – the interest rates that banks charge when they borrow from each other – have been pushed up by the rise in gilt yields.
The five-year swaps rate yesterday rose above 4.52%, their highest level since October 2023. We’d expect that to result in higher interest rates on fixed-term mortgages.
AJ Bell investment director Russ Mould explains:
Credit card, mortgage and auto loan interest rates will rise if bond yields rise, as the lenders seek to preserve loan book margins and manage their risk.
Such moves would undermine Andy Burnham’s push to ease cost of living pressures.
Yesterday, the yield on UK 10-year government debt hit its highest level since 2008, before retreating to less painful levels thanks to a drop in the oil price.
Oil has been one of the key factors driving the bond market sell-off, as inflationary pressures from high prices could force central banks to raise interest rates.
Tom Simpson, managing director of homes at YorkshireBuildingSociety, points out that swaps rates were more volatile in March, at the start of the Iran war.
Simpson told Radio 4’s Today Programme:
All things being equal, you would expect a modest increase in mortgage rates based on what we’ve seen so far.
Simpson emphasised that the moves in the swaps market are more modest than six months ago:
“A 0.1 [percentage point] increase, which is what we’ve seen over the last week, is much less of an increase than when we saw a 0.5 [percentage point] increase in 10 days in March when the Iran war broke out.”
The agenda
9am BST: Eurozone services PMI report for August
9.30am BST: UK services PMI report for August
9.30am: ONS Business insights and impact on the UK economy
10.30am: Challenger survey of US Job Cuts
3pm BST: US services PMI report for August
