Supplement 11 Feb 24 – Let’s talk about the yield curve, baby

Feb 11, 2024

“A trap is only a trap if you don’t know about it. If you know about it, it’s a challenge.” – China Miéville, King Rat


Before we begin – Rod Turner and I are running a free online Partners in Property PIP Taster Event on Monday 26th February at 7pm. We are talking about the Property Puzzle in 2024 – taking on a whole number of topics including stacking deals in the current environment, rents, house prices, financing arrangements, and the likely impact of the upcoming general election – amongst a number of other topics! It is 90 minutes long and free to air, won’t be recorded, and won’t be repeated – sign up for free at 


So – before getting stuck into this week’s soapbox regarding the yield curve and the sleepless nights (not really – well, maybe the occasional one) that it gives me – onto this week’s Macro. It was an interesting week, and developed a number of threads a little bit further which have supported much of what I was saying throughout January, and made a number of other commentators and forecasters look a little bit silly for the whole of 2024 already, and we are only 6 weeks in! 


I did look at most of the macro releases with relative glee, although the yields hardened on the back of some of it, which never pleases anyone reading or listening to this article, let’s face it! As usual I am picking my top 4 subjects – the PMIs, the Halifax House Price Index, the RICS house price balance, and the……yep…..the bond and swap rates.


The PMIs first – the purchasing managers’ indices. We had construction and services – services being the largest so I’ll start there. The print was 54.3 for January (increased from the flash print by almost 1 point) – 54+ is above the longer term average, and a pretty bullish reading. Consensus had come up to 53.8, knowing that the final number was above the flash estimate it seems, but still 0.5 points too bearish. The services side of the economy is not far from being described, within a couple of months, as “racing away” or booming, frankly, particularly if the prints move further upwards from here (although that would be difficult to justify). I don’t believe that the coming path will be particularly smooth, but services look in relatively rude health given all the challenges being faced thanks to wage pressures and labour shortages.


Construction was also better than forecast – but still under 50. A massive miss to the upside on the forecasts, though – who predicted 47.3 on average. The print was 48.8 – closing more than half of that predicted gap to 50. Shrinking, but not much, is the message for January (perhaps this was weather related as we had a milder January than usual, although the rainfall was hardly helpful). It still also seems to be related to the fact that the forecasters are just believing their own hype about how bad (or not) a state the economy is in.


Onto the Halifax, then – subject of some of my ire in January. No apology or even mention of their very bearish -8% prediction for 2023 which turned out, on their own index, to be a +1.7% year – and, indeed, they stayed bearish for 2024 with a prediction of -4% in the face of a very positive print for December 2023. They look to have stayed as foolish as they were last year as their own index printed a massive +1.3% up on the month, after a +1.1% last month. Already 5.3% ahead of where they need to be to be correct – chasing a price correction that simply doesn’t look like it is coming, because they’ve misunderstood – or frankly completely missed – inflation, aside from anything else. Poor form. Sack the team and get Propenomix to do your predictions instead? Or, at least, own your woeful forecasting.


Swinging on to the RICS house price balance. One of my favourite metrics, because it “takes the temperature” in the now of the people going to value your and my properties next week, and gives us a flavour. RICS surveyors are very rarely known for anything other than being stark realists, pragmatists and, if anything, overcautious types. The print moved from -29% in December to -18% in January – still negative, but ahead of the consensus forecast of -25% and actually the best print post-Truss. Close to that phrase that I used last week – cautious optimism – certainly en route. 


I also think surveyors are perhaps a little slower than “real time” in changing their minds, so this is more of a “nowcast with a slight lag” than it is a front-running metric. I expect February’s number to improve yet further and come back to single digit negative.


That leaves the auld enemy – the bond yields. All this positive (or better than expected) news for the economy only serves to prove that point – things aren’t as bad as anyone thought, but the reality of that position is that rates CAN stay stronger for longer (as it looks at the moment) and until we see a raft of bad news metrics – almost completely absent this week – the yields are going to trade at the top of the current realistic range which I’ve identified as 3.5-4% for the early part of this year in general with a .25% either side “expansion vessel” to allow for momentum to carry the market outside of the range it should truly be in. I strongly feel this is the range in the absence of a material change to the facts. 


We started the week with a massive gap up from last week’s close. Instead of starting around 3.80% on the 5 year gilt, the open was above 4% – most irregular – and then dropped massively to start trading in and around the 3.85% mark. That 3.8-3.9% range sufficed for most of the week until Friday’s market started to harden back up towards that psychological 4% barrier, and the close was at 3.972%. Remember my rough rule of thumb – add 2% onto that for a realistic total cost of 5-year limited company mortgage debt, so 6% no fee, or 5% with a 5% fee, or somewhere in between. Products cheaper than this represent good value, so if you are dallying around a price, again in the immediate market it is worth taking those deals that were priced in a lower yield market in January.


The swaps were not a lot different at all, and the premium is pretty much zero above the 5 year gilt at the moment. That demand for the 5-year swap is unlikely to increase much at the moment – this hardening in pricing will have a stifling effect on demand, and the danger is that just as the market warms up again the pricing still has a very negative impact. It’s hard for the mortgage companies to send money out into the residential mortgage market at below the bond yield – they already make paper-thin margins on these mortgages but do it to acquire new business that will one day potentially get into that profitable range when they are paying a standard variable rate, or similar, as a hefty percentage (30%+) do. 


So – we might not be far away from the sub-4% owner occupier mortgage disappearing temporarily, and that will have a negative psychological impact on the market. All these points are “at the margin”, so small they are just about worth discussing, but all part of the battle that we are feeling at the moment to bring the interest rates back down to something that looks like an early 2010s market, which was functional enough for buy to let and owner occupiers without seeing any crack-up booms (aside from London, where £100bn+ of foreign investment in cash was enough to set fire to that market and start a bubble, which didn’t pop but instead deflated very slowly from 2014/15/16 onwards depending on which part of London we are talking about). That bubble was worked through by 2020 which is why London could also see some reasonable capital gains throughout that period, even though in reality those have all been swallowed by inflation (fine if you have nominal debt, not so good for those unencumbered).


It does seem a market at the moment of “he giveth, and he taketh away” – and that’s where we are. Fragile, but nowhere near as volatile as 2023, would characterise it well at the moment. That phrase needs wheeling out once a week though, at the moment: “The risks remain to the upside.” And they do. But I don’t say it with the goal of making you scared of your own shadow – it doesn’t stop me trading – it just means I want and need to be cognizant of any significant effects coming at this sort of time where inflation is only nearly just about starting to become under control, and the bond yields are still fragile.


That winds up the macro for the week and so – feeling strangely appropriate for a Sunday – it’s confession time. I know from those I speak to who read the Supplement regularly, and/or listen to Propenomix, that I could do with adding more clarity sometimes, particularly when I get stuck right into some of the more complex constructs that we have to deal with when we are trying to look into the future for the best insights about the safety, security and overall performance of UK property as an investment. However, those who know me and have interacted in the “real world”, IRL as the kids call it – know that I’m a straight shooter and spend a lot of time and effort trying to make sense of, well, everything that might impact UK property.


Onto the yield curve and its strange shape currently. It has been over 12 months now where we’ve had this kind of “snake” style shape. This week’s image shows you what I mean. Breaking it down into its component parts:


In the short(er) term, the yield curve is inverted. This means (simply) that short term savings get higher rates, and short term borrowing costs more (per annum) than long term borrowing. It decays right down from the 3-month point to the 5-year point – the 3-month tends to trade pretty much at the Bank Base rate, and is currently just under that 5.25% mark or thereabouts. The 5-year is more like 3.85% or so – a considerable difference, and as I say with regularity, one that we borrowers are particularly grateful for as we tend to be on a 5-year cycle.


Once we hit that 5-year point, we go somewhat flat. Between 5-year and 10-year gilts, the increase in the curve is very limited indeed. It is only 0.15% over that 5-year period. You could see this as a point of relative economic misery, BUT you must appreciate that a flat yield curve between years 5 and 10 is not the same as a flat yield curve between years 0 and 5. The yield curve, conventional wisdom tells us, tends to flatten when a recession is coming (having been inverted). 


However a quick glance at last year’s yield curve (also in this week’s image) will show you that the curve flattened at year 4 last year at the same time, and we’d expect that to be year 3 one year further on, but it isn’t. It has gone the other way. Just one of the vagaries of interpreting this stuff too literally, perhaps? 


On goes the inexplicable pattern – a pattern that, in spite of scouring various search engines and asking numerous AI tools, no-one else is willing to explain either, or even give a better name to than “the snake”. From year 10 to 30, we have a relatively normal-looking yield curve at those points. So – kick the can down the road far enough and everything will be OK? Maybe so. 

We finish with a tailing off at year 50 that is fairly considerable, effectively 20 years of inversion. The natural rate of interest should, by all accounts, look pretty Japanese in 2050 or so unless there’s some major productivity growth on the horizon, so in 50 years time a tilt at a lower rate looks fair.


One point of order. If the 3-month bond returns 5.22% annualised, and the 6-month bond returns 5.23% annualised – it is fair to say that the market is not seeing much in terms of differential in interest rates between those two periods. If the 6-month was instead 4.22% annualised (that would be a strong inversion) what that would be saying is that (very roughly, not correct maths because of compounding but just to illustrate the point) the next 3 months will be at 5.22% and the expectation for months 4-6 is 3.22%, a really dramatic dropoff.


So, every point on the curve to the right of the previous point is factoring in the returns of that previous point and the points before it. I hope that makes sense, but I can’t find a better way to explain it than that!


In conclusion, we have inverted (for 5 years), flat (for 5 years), normally performing (for 20 years) and inverted (for 20 years). I know the temptation is “not to care” about 10+ years in the future, but I did want to dwell on it briefly. This is suggesting that we have a recession coming in 5 years time (or so), although 12 months ago the suggestion would have been that that recession was coming in 4 years time. And in the previous 24 months or so, that timescale has been as short as about 2 years without a recession really manifesting (although we still need GDP figures for Q4 2023 and there is still that chance of a technical recession that, if we went into it, we are already out of almost certainly). So – this isn’t “the answer” – it is just the market’s best guess at this point in time, and the market is assumed to know all of the information that is relevant.


This is the famous “guess the weight of the cake” logic. If you ask 1000 people what a cake weighs, at a fair, even though some will give ridiculous answers like 10 grams or 100 kilos, the average tends to be almost smack on the weight of the cake. The wisdom of the crowd, if you will. The assumption is then that we will move in a fairly orderly fashion after that recession plays out, and won’t need to drop rates incredibly dramatically but might be down at say 2% while it does – then we will move back to a fairly orderly world and back to base being at the 4.5% (or so) level, to then trend down to the 3.75% level in 50 years time (2074!).


This doesn’t sound realistic to me. The natural rate of interest was, before Covid, really about 2.5% or so. Perhaps 2%. It was kept lower by inertia, frankly, and lack of appetite to stick one’s neck out in finding the “right time” to raise the rates. Carney would also tell you it was Brexit’s fault, and there would have to be some sympathy with that position as well, being as fair as possible.


It’s very possible that Covid has changed that (this would be the secular inflation argument) with all that stimulus, concentrated in such a short space of time. I could believe it would be now 3.5%, or even 4% (although some of that would tail off, a bit like a nuclear half-life, as Covid gets further in the rear view mirror. That half life might be a decade or so long, though, looking at the scars of previous pandemics). The long term surely sees the natural rate back down at 2%, if not 1.5%, as things continue to industrialise and demographics continue to move significantly against the UK economy – without a significant and structural change to the welfare and healthcare systems, anyway – and who is going to commit that brave, necessary act of complete political hara-kiri?


So – I don’t get it. I’m not afraid to say I don’t get it. Or perhaps you will believe after reading or listening to all that that I DO get it, I just don’t agree with it. That might be a fair reaction. I’d love anyone listening or reading with some different views, and more experience than my precisely zero as a bond trader, to set me straight on what I’m saying. It honestly looks like the longest term bonds are where they are just because the shorts are where they are, and that’s why at 4.5%+ 30-year gilt it looks like a complete giveaway to me – exceptional value.


I wanted to say a little about some of Zoopla’s recent report releases too. I’m going to focus on their article about first time buyers which was released around a week ago.


In a candidate for “underquoted stat of the year”, they cite something I’ve mentioned in passing with the hard numbers behind it: “First-time buyers accounted for just over half (53%) of all home loans last year, the highest proportion since 1995.”


You’d think you’d have heard this from another source, no? Shouted from the rooftops? But apparently not. What does it REALLY tell us? It tells us that investors buy with numbers in mind, and they were priced out of the 2023 market, mostly (if using leverage). However, the first-time buyers buy on motivation and emotion and are the very most motivated buyers out there.


It also tells us, I believe, that the second-steppers or those with an existing home are closer to reality. They have already made that significant first step, and the motivation to move clearly decays with each move. The average house only trades around once every 22 years in the UK, although that doesn’t mean we necessarily wait 22 years to move – some will move, then move again in 2-5 years, then maybe move again in another 5-7 years, and then stay for 30 or 40 years rather than just jump every 22 years – so demographics (and of course income) will play a big part.


There were some who would have been mortgage prisoners. Some just priced out from the next move up by the cost of credit too, of course. Some who didn’t even realise their mortgage was portable, and battened down the hatches rather than even consider moving, too influenced by the negativity in the press and the constant, under-researched, frankly vicious forecasts of the market falling. 


The overall actual number of FTBs fell (perhaps why the stat remains mostly underreported) – but, “compared to 2022”. 2022 just cannot be called a normal year. Kicking off with a house price boom – putting FTBs under extreme pressure to “jump now before it goes up even more!”, followed by a near-nuclear event when “Liz the Lettuce”, who still doesn’t seem to have climbed back into her box in utter shame, as she should, entered 10 Downing Street. 


The average deposit is around 19% of the purchase price. Pretty healthy. Speaks to the fact that the 95% mortgage is only helping at the margins, and that’s why take up has been limited (and why the 99% mortgage, as framed, won’t do anything at all – another empty and under-researched pledge). 


Perhaps the most interesting stat (and the one that speaks to the motivation level) is that the popularity of the terraced house as a starter home was somewhat substituted for the popularity of the flat. Maybe leasehold reform is a consideration here, or maybe the motivation to get “something” is so strong that the flat becomes good enough for the first step. 


Average first time buyer prices are around 6.7 times the average UK salary (not sure that’s a fair comparison, because you’d want to use the average for an age group, you would think, rather than just the UK average).


This really goes to show, though, that most of the help at the margin is smoke and mirrors. People have had a chance to save a really chunky deposit for a first move (19% average feels massive, to me) – and so the argument of the deposit being the blocker seems somewhat limited. Perhaps – dare I say it – some are not really aiming to buy houses at all, for a multitude of different reasons……..although the idealogues don’t want to give that argument any credence at all, even if it comes from the mouth of Klaus Schwab himself.


To finish I wanted to talk about the auctions in January – fuel for Sunday’s live conversation live at 9am UK, aside from anything else. I’ve made a number of calls that January’s (and early February’s) auctions will be a significant bellwether for the overall property market. The market looks truly functional for the first time in a long time. Overpriced stock isn’t selling. Badly marketed stock isn’t selling or is underselling. Poorly priced HMOs or commercial/mixed-use stock isn’t selling apart unless it is to retail investors or the uninformed. Our side business buying at auction is alive and well, and getting deals done that are excellent if my reading of the capital growth coming down the pipe is correct.


We need time to see the data and for me to share it, but there is no time like the present to be buying. I’d personally favour having a strong look at the open market – more listings last week than ever before on Rightmove – and working on old, stale stock that believes, feels and looks like a stagnant or falling market – and getting busy. That’s very much one of our weapons in the toolkit right now.


Congratulations as always for getting to the end – don’t forget the Taster Evening, you can register here: and Rod and I will delight you (ok, what do they say, don’t overpromise and underdeliver) – or at least briefly entertain you – with our respective takes on the current market and the challenges coming in 2024 – alongside, of course, the opportunities. Until that event – and until next week’s article – Keep Calm and Carry On, of course!