Boulger (pictured) commented after several days of stock market turmoil which saw the FTSE drop to a 15-month low on Wednesday and record the largest single day fall in 16 months.
The sell-off in equities has meant money piling into Government Bonds, pushing yields down.
“Two-year gilt yields closed 8 basis points down today (Wednesday) but the five-year by a massive 19 basis points and the 10-year by nearly as much – 17 basis points,” said Boulger.
“Despite the recent sharp fall two-year yields are still marginally higher than a year ago – 0.04% – 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 five-year gilt yield has fallen 0.38%, with 10 and 30-year down more than twice as much, by 0.83% and 0.86% respectively, resulting in a significant narrowing of the yield curve.”
Gilt yields have been reflected in swap rates, a key factor in lenders’ cost of funds when pricing fixed rates mortgages. As an example five-year swaps closed today at 1.47%, compared with a recent peak of 2.29% only 3½ months ago; the two-year swap closed at 0.94% and the 10-year swap at 2.04%.
“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,” said Boulger.
“For example, Accord announced a market leading five-year fix of 2.59% at the end of last week, available up to 65% LTV with a £975 fee, but this is unlikely to remain the lowest rate for long. In fact I think there is a strong chance we will soon see some five-year fixes challenging the previous lowest ever five-year fix of 2.48%, which was available nearly two years ago.”
