SWAP rates and LIBOR rates on the move in 2009

The entry into the New Year was no doubt followed by many with a New Year's resolution on how to improve their lot in life and a glass or two, to bid fairwell to a truly awful 2008.  Of course, there would be those that would ask, was the glass half full or half empty?

Irrespective of your view of life, the first few steps into the New Year may have been bright and sunny for many people, but like the weather it has been bitterly cold, just like the economic data and outlook.  Sadly, 2009 hasn't introduced a clean slate and rid us of the "credit crunch" nor heralded a change of heart by lenders, yet...

Early economic results have been poor and sadly two further lenders, Bank of Ireland and Bristol & West have decided to close their doors to broker introduced business. Despite the news reports of those who prefer to see life as "half empty" and "we're all doomed", there are some positive aspects that need to be highlighted.

Much has been made by lenders of the Swap markets and cost of LIBOR funds to finance their loans. During much of 2008, the spread of Swap rates for 1, 2, 3, 5, 7 and 10 year funds was held in a tight range, with approximately 0.6% difference between the cheapest and most expensive.  However, due to the volatility in the markets, 10 year swaps were actually cheaper than 1 year Swaps.  The high cost of these rates reached a peak in late September 2008, at which time the 1 year Swap topped 5.81%, whilst 10 year rates reached a maximum of 5.26%.

The decision by the MPC at the Bank of England and other major Central Banks to instigate a unified reduction in Bank of England Base Rate (BBR), has helped in restoring some normality to the cost of these funds. When BBR began to fall in October 2008, Swap rates also began to settle into an expected order, with 1 year Swaps cheapest to buy and 10 year costs returning to be the most expensive. 

Although slow at first, the cost of each of the Swap rates has continued generally downwards, although this has been coupled with a widening in the gap. Whilst the gap in costs in late September 2008 was 0.6%, as at 9 January 2009, 1 year Swaps stood at 1.77%, and 10 year Swaps stood at 3.49%, a difference of 1.72%. Not all lenders have yet embraced these lower costs, some preferring to introduce collars into their products or widen their margins.  However, that is another argument.

The past year has also seen significant changes in the cost of LIBOR rates. It is hard to believe that on 23 January 2008, BBR was 5.50% and on the same day the LIBOR rate was 5.48%, remarkably 0.02% below BBR.  Needless to say this pleasent situation didn't remain long, with BBR and LIBOR slowly diverging throughout 2008. Between late January 08 and June 08, the gap in the two rates increased, with LIBOR 0.96% over BBR by June 2008 and still remained at 0.7% above BBR in September.  It was at this point that the wheels were perceived to have fallen off and banks became very reluctant to part with their money. This resulted in a wholesale removal of products, citing cost of LIBOR as the reason.

Following the first BBR reduction in October 08, LIBOR had increased to 1.77% above BBR.  It took a full month to recoup the increase, and still remained 1.18% above BBR by the time we reached November's MPC decision.  Following this historic reduction in BBR by 1.5%, LIBOR had increased to 2.56% over BBR.

So where is the good news, lenders haven't reduced rates in some instances. Well, part of this may be due to the lender having fixed its rates for three months and has not yet reached the review date.  Alternatively, it may simply be due to them wishing to price themselves out of the market for the time being.

   

However, like the Swap rates over the past few months, LIBOR has also continued to fall at a reasonable pace.  Despite jumps on the BBR reductions in December08 and January 09, the banks have supported the call for more assistance and LIBOR has made a good recovery, and is expected to be 2.33% (when confirmed on 13 January) only 0.83% above BBR.

Although it is too early to predict if there will be a further reduction in BBR in February 09, the longer term financial forecasts are predicting a fall in BBR to 1% within 3 months and to 0.5% within 6 months, this rate being held until this time next year.  If this becomes reality, then there is potential for significantly reduced funding costs, which would hopefully bring lower borrowing costs later in the year.

If you wish to adopt a New Year resolution, the glass is half full and remain positive. With this overall reduction in the cost of funding, some reasonable short term Buy to Let fixed rates and residential fixed rate mortgages can't be too far away.  If the cost of 5 and 10 year funds reduces further, there could be a strong argument to take advantage of a longer term fix, where appropriate.   

We just need the lenders to start lending properly again and we are there!