Supplement – one more move

Dec 26, 2022

“Remember Sully when I promised to kill you last? I lied.” John Matrix, Arnold Schwarzenegger’s character in Commando.


Welcome and festive greetings! One more supplement for 2022. The quote is because I promised no more heavy stuff – but one event that slipped in last week without creating many headlines – but with significant implications – just has to be discussed first. Sorry, not sorry. The markets rarely sleep so neither can we!


This event is the end of the Widowmaker. For those who’ve been anywhere near a bond trading desk – or for those who have a near-perfect record for reading the supplement – you will have heard of the Widowmaker trade. This is on the basis that every bond trader, during their training, points out that the Bank of Japan cannot keep the bond yields on the 10y at 0%, +/- 25 basis points, forever. It MUST slip one day.


Except it never has. So – it costs to take up the short position, waiting for yields to rise and thus bond prices to fall. The costs of the short have made this a losing trade for many years. Decades, in fact. Hence the mantle – the Widowmaker.


Although, this week, in that way really significant news often gets buried just before a holiday period…….the Widowmaker finally paid out. The Bank of Japan conceded that they would instead allow 50 basis points of flex around 0% – or in more likely language they wouldn’t buy any more 10 year bonds until the yield reaches 0.5%.


Now listen. I know this sounds incredibly small. Quarter of a percentage point small. But it is massive – because of the symbolism of it. This is the true “butterfly flaps its wings in Australia and the weather changes in England.” UK and US bond yields shot up upon this news, and the 5 year pushed back up into 3.7% territory, when in recent weeks it had tested the 3.2% level again on the downside.


This pushed the 5y swap back above 4%, when recent weeks had seen 3.6%.


Close readers will know that this pushes rates back to 6%+ territory on the 5 year limited company fixed rates. They aren’t necessarily gone yet but some products were pulled the day after the Widowmaker gave up the ghost.


And so we go into 2023 with the interest rate situation right in the balance again. UK resi mortgage 5y rate will be hovering around that 5.5% rate that I’ve discussed is very sensitive. Large banks will be able to afford more like 5-5.25% if they want to compete on price. The increasing cost of credit and its immediate impact on the house price is right in the balance.


If you are sitting digesting vast quantities of food whilst reading this – make your first note to strongly consider taking any of the 5.49% Ltd Co fix that is left if any of the lenders are sleepy over Xmas and your brokers are working at some point before 3rd Jan. At least get the decisions in principle in. If your 2023 plan includes “wait for the rate to get better and then strike” – that methodology took a kicking this week.


Back to stacking deals at 6-6.25% for us, next quarter!


This isn’t all bad – I feel obligated to say that one more time. This means pressure on the poorly organised or the illiquid. Competition in the rental market will go down, not up. There will be further excess pressure on rents as significant upwards pressure on wages continues.


Mathematically, in the moment, this helps – depending on how close to the affordability ceilings you already are in your portfolio. Minimum wage moves up over 9% in April and that helps many renters (although electricity bills will be up again). As the gas goes off and the even bigger problem is kicked down the road once more to October 2023 (the true winter of discontent?) – with the price of everything going up, rents will follow.


More inflation will also help somewhat to protect nominal house prices.


It’s a tricky one to call – as it always is – but that’s exactly what I’ll do next week. Until then……peace and love to all, and Happy New Year in advance!