Swap watch: Understanding the recent spike in swap rates

Read the latest thoughts from our Head of Product, Peter Stimson who shares his thoughts on the swap market, rising inflation and how they affect mortgage rates. ?

It’s hard to remember that just two years ago, the two-year swap was around 0.50% and the five-year around 0.75%. This year alone, two-year SONIA swaps have increased by over 1.6%, and are currently over 6.0%, with five-year rates increasing by more than 1%,?now sitting around?5.30%. This means longer borrowing is now cheaper than short.???

SONIA Daily 2 and 5-Year Swap Rates?

Source: Chatham Financial ?

Swap rates reflect where the market thinks the cost of fixed-rate money is going to be over a given duration. With the Bank Base Rate (BBR) currently at 5.0%, the markets’ view is that there are further rate rises to come, with some analysts predicting BBR could rise as high as 6.50%. Whilst this number is perhaps not shared by the majority, inflation is proving to be incredibly stubborn - the latest set of numbers from the Office of National Statistics (ONS) still show inflation running at 8.7%. In particular, there are a concerns around food inflation, which is running at 19.1% YoY.?

There are also concerns about rising wages in response to inflation. In the period to April this year, wages, including bonus, have been increasing at 7.2%. Whilst its clearly understandable that people want higher wages in response to high inflation, the concern is that inflation becomes imbedded in the system creating an ‘unvirtuous circle’. With the UKs challenging issue of full employment and a lack of ability to ‘flex’ the workforce, this remains one of the biggest issues to overcome. In the past, a lot of the excess employment was taken up by EU workers, which now clearly cannot happen.??

The final thought is that whilst some of the challenges we face are unique to the UK, higher rates and inflation, are a global phenomenon at present. The war in Ukraine, the re-establishing of global supply chains after the pandemic, and the start of global trade wars/near shoring, all mean that goods and commodities have been increasing in price. For example, central government rates have risen from near-zero to 5.25% in the US, and 4.0% in the Eurozone.?

But it’s worth remembering that although fixed rates are based off swap rates, it’s only the markets predicting where rates could end up and historically, and they tend to overshoot. Good data can equally see rates falling quickly. Given where rates are now, hopefully we are now approaching the top of the market.

Peter Stimson?

Peter Stimson is the Head of Products at MPowered Mortgages , a fintech mortgage lender that uses AI to speed up the mortgage process for mortgage brokers and customers alike. Peter has been in the mortgage industry for over 30 years, previously working in senior roles at GMAC-RFC, Lehman Brothers and Landmark Financial Services.??

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For intermediary use only. ?