What caught my eye this week.
With Storm Babet tap-dancing across the flat roof of my extension, I wondered how I’d spend the windfall afternoon a cancelled trip to the provinces had gifted me.
(Broken British trains, as usual. Flooded, this time).
Obviously I chose to indulge myself by reading the new IFS Green Budget 2023 with a latte whipped up with my infamous espresso machine.
Yes, I know how to party.
Here are five interesting charts from the report, with a few thoughts on each.
1. First some good news: lots of jobs
Two defining images from the TV broadcasts of my childhood are the AIDS iceberg, and long dole queues as three million languished unemployed.
Who says nothing ever gets better? The UK unemployment rate fell to its lowest level since the 1960s at 3.6% in early Spring 2023, although it has since rebounded to just over 4%.
True, there is shade you could throw on this achievement. Many in the UK are poorly-paid. Brexit has constrained the supply of workers, so while unemployment may be lower as a consequence, it’s also pulled down GDP growth. And lots of older workers apparently gave up working during the pandemic, which might be a good thing for some but others will live to regret it.
Still, I’d take those issues over millions feeling like they’re on the scrapheap.
2. Growing nowhere fast
Absentee workers are one potential reason why GDP growth has been so slow to rebound, after the Covid shock.
And while you’d normally expect labour markets to loosen in a sluggish economy, as we saw above they have tightened. As a result wages have actually been rising (albeit only very recently ahead of inflation) despite the foot-dragging economy.
Clearly the GDP break must mostly be a hangover from the Covid disruption: fewer workers than otherwise, people focusing on the less-productive ‘experience’ economy once we could go out again, snarled supply chains, and so on.
Moreover, to look at it glass half-full I suspect this weak performance will take the edge off any upcoming recession – which we’ve been promised for 18 months – if and when it finally arrives.
It’s harder to slump when you’re already slouching.
3. Won’t anybody think of the landlords?
Rental yield isn’t everything, as any How To Get Rich In Property seminar will tell you. The big money is made from capital gains.
And that’s true, but to get capital gains you either need to see more attractive underlying fundamentals – to boost the net present value of your asset – or you need more suckers – to buy off you in the future.
It’s hard to anticipate either in this graph. Bar a blip during the financial crisis, the last time the five-year gilt yield outpaced rental yields was the early 1990s. As interest yields fell, the buy-to-let boom took off.
True, a recession and/or lower inflation bringing interest rates down could change this picture pretty quickly.
But then again in that scenario you’d also enjoy a nice bump to the value of your gilts – and without a broken boiler or a defaulting tenant in sight.
4. Big Government is watching over you
There are many notable things going on in this pretty dispiriting chart. (Do highlight anything you feel is interesting in the comments below.)
However I’ll just note here the far chunkier blocks of fiscal support (the government giveth…) and taxation (…and taketh away) seen in the last few years
While I blame this long Conservative administration for many things since 2016, I don’t blame them for the pandemic. Nor would I particular criticise the big picture decisions they and others made to try to support the economy in 2020 and 2021.
At the micro-level in Downing Street it was clearly a shitshow. But when it came to the grown-up levers of power, every country was working without a rulebook.
I think it’s mostly unfair to blame either Central Bankers or politicians for the subsequent high inflation, for example. Nobody knew exactly what to do, nor what would happen – however it looks with hindsight.
Either way though, the result is that government has been much more directly and visibly impacting household incomes in recent years.
I can’t helping thinking that this will have long-term political consequences.
5. It’s a fix
Many Monevator readers will already know the UK has moved to a predominantly fixed-rate mortgage market, but it’s still striking to see it in a graph like this.
Indeed, given the centrality of property (and property prices) to British economic life, the changeover amounts to something of a quiet revolution.
If you’re wondering why we haven’t had a house price crash yet despite the speedy rise in interest rates, fixed rate mortgages abounding is a big reason.
(Another is that about a third of UK homes are now owned outright, with no mortgage. The third is the tight labour market we saw in the first graph).
Prices holding up despite higher rates is good for anyone who already owns their own home – and frustrating for those who can’t afford to do so.
But home buying aside, the nation’s mortgage holders continuing to remortgage onto higher fixed rates over the next couple years must surely be another dampener on economic growth.
I do also wonder what will happen if rates are cut sharply in, say, 2025? Presumably we’ll see lots of stories about homeowners being ‘stranded’ on 6% fixes!
Something to look forward to…
Anyway, there’s lots more to see in the IFS Green Budget if these are your bag. Let me know if anything catches your eye in the comments below.
And have a great – wet and windy – weekend!
From Monevator
Review: Smarter Investing by Tim Hale – Monevator
Are Premium Bonds a good investment? – Monevator
From the archive-ator: It’s too late to get into buy-to-let – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
UK inflation holds steady for September… – CNBC
…and here’s which goods and services have changed the most in price – Guardian
Vanguard ‘satisfied’ LifeStrategy fund does not breach FCA’s concentration limits – ETF Stream
Glasgow named the top UK city for first-time buyers – This Is Money
Wine definition to be watered down in post-Brexit move – BBC
House prices still rising – just – says ONS – MoneyWeek
The strange death of corporate Britain [Search result] – FT
What Poland’s surprise election winner means for the world – Politico
The science of making people happier, not just wealthier or healthier – Vox
Products and services
Energy firms ordered by Ofgem to improve customer service – This Is Money
St James’s Place: exit fees are on the way out, what should customers do? [Search result] – FT
Chorley BS offering 5.3% on ‘easy-access’ cash, but with big strings – This Is Money
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
The lasting impact of ID fraud [Podcast] – Which
Get £50 free trading credit when you open an account with Interactive Investor. Terms apply – Interactive Investor
You can now use Tesco Clubcard points to pay for Brewdog pints – This Is Money
£8 is the new £5.99: five rules for buying wine today – Guardian
How much does the flu jab cost? – Be Clever With Your Cash
Top energy-efficient homes for sale, in pictures – Guardian
Comment and opinion
A few laws of getting rich – Morgan Housel
High TIPS yields are a retirees friend [US but relevant] – Morningstar
Crunch time for student buy-to-lets [Search result] – FT
Money and happiness: lessons from lottery winners – Darius Foroux
The missing billionaires [Podcast] – Talking Billions via PlayerFM
How to invest during times of war – Of Dollars and Data
Budgeting for random acts of generosity – Humble Dollar
Why investors are buying gilts again – This Is Money
This is the worst bond bear market in history – A Wealth of Common Sense
In praise of slowness, in life and investing – Safal Niveshak
Naughty corner: Active antics
The FTSE 250 is looking very cheap right now – UK Dividend Stocks
Risk and returns, before and after the fact – The Diff
Momentum is everywhere – Alpha Architect
Kindle book bargains
The Panama Papers by Bastian and Frederik Obermaier – £0.99 on Kindle
The Simple Path to Wealth by JL Collins – £0.99 on Kindle
Mastering the Market Cycle by Howard Marks – £0.99 on Kindle
The Power of Moments by Chip and Dan Heath – £0.99 on Kindle
Environmental factors
How to make space-based solar power a reality [Search result] – FT
Coca-Cola trial to make bottle tops out of CO2 emissions – BBC
Yet another reason not to use ESG scores – Klement on Investing
If you’re worried about the climate, move your money – The Atlantic
EU to crack down further on micro-plastics after glitter ban – BBC
Robot overlord roundup
Two friends spent $185 on an AI side hustle and sold it for $150,000 – CNBC
After ChatGPT disruption, Stack Overflow lays off 28% of staff – Ars Technica
Weight loss drug economics mini-special
Goldman Sachs: obesity drugs could be a $100bn market by 2030- Yahoo Finance
MedTech stocks are in tumult due to the obesity-reduction drugs – Herb Greenberg
Something is golden in the state of Denmark – The Atlantic
How weight loss drugs could radically reshape the food business – Axios
Ozempic is obviously good for business – Very Serious
Off our beat
The Lincolnshire village honoured in every Disney movie since 2006 – BBC
Burnishing a legacy – Humble Dollar
How to make your mind maybe one-third quieter – Raptitude
The secret life of the man who stole $3BN of Bitcoin – CNBC
A skeptical review of Permacrisis by Gordon Brown, Mohamed El-Erian, and Michael Spence – Guardian
UK’s nuclear fusion site ends experiments after 40 years – BBC
On coffee, the world’s favourite stimulant [Podcast] – Tim Ferris
None of your photos are real – Wired
Rishi Sunak, decorated hero of the war on motorists, is no match for a real conflict – Guardian
Brunch is for assholes – We Are Gonna Get Those Bastards
And finally…
“The two greatest enemies of the equity fund investor are expenses and emotions.”
The Little Book Of Common Sense Investing
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> the UK has moved to a predominantly fixed-rate mortgage market, but it’s still striking to see it in a graph like this.
I’ve never understood this. Surely this is just a scam to swell the profits of mortgage brokers and providers – arrangement fees, mortgage indemnity fees, all that sort of thing? Somebody’s got to be paying for all those extra transactions, and it sure as hell ain’t gonna be the institutions or the brokers. You wouldn’t churn your share portfolio every two/five years, would you?
Well, sometimes you would, I churned my SGLP into SGLN over the tax year specifically to harvest CGT, but that’s not the same for a massive debt. Someone also has to validate you are a decent bet each time you renew, be unlucky to lose your job as you come up to a fix and you’re in a serious hole or on the SVR. The SVR seems to be more inflated nowadays than times gone by when it was the main offer. And you’re exposed to that risk 5 or 12 times in a typical 25 year mortgage term. This really isn’t progress, even if it makes you feel clever for the short periods when you get ahead of interest rates.
@ermine – churn them and burn them, as stockbrokers used to say of their clients. There was a short spell in the 2010s when it looked like 15 year fixes might take off, but they didn’t. Now the super long fixes means locking into much higher rates, and fewer lenders still offer them (YBS and Virgin Money).
@TI @All: there are only three ways that this can go, looking beyond 2025:
– rates fall materially
– rates stay the same (more or less)
– rates rise materially
IMO, it’s unlikely that these are actually equiprobable, but it would still be a significant error, absent any evidence to the contrary, to proceed upon the basis that one is more likely to occur than the other two.
However, what we do know is that the balance of risk to reward in proceeding with one or the other scenario as a basis to invest is not in equilibrium. Michael Batnick, over at The Irrelevant Investor, points out that for conventional 30-year US Treasury Bills (falling due for payment of principal on 15th August 2053) a 300 basis points rise in rates now would lead to only about a 31% fall in bond prices, whereas a 300 basis points fall in rates would lead to a nearly 76% rise in bond prices – so a ratio of approximately 2.5 to 1 in the risk to reward scale in favour of being long on the longest duration T Bills, even assuming that the rate rise and the rate fall scenarios are equally likely.
And if rates stay at about the same level as they are now, then so to do prices, and then you earn 5% p a., which isn’t too shabby overall unless inflation soars.
Feel the need to correct you – Brexit has not constrained the supply of workers accross the economy as a whole. It has changed the supply. No longer is it based on race, which is what remainers wanted, but now on need. So we have more care workers from Asia and less bar backs from Europe. Educate yourself.
@BBlimp Feel the need to correct you – it was not based on race because there is no such thing as race. Educate yourself.
Very interesting, but some of these graphs are a nightmare for us colour blind people!
Looks like brokers were persuading punters to fix the low rates in 12/13 (and enjoy the two yearly renewal fees). It might be a harder sell now to fix at these levels.
For the first time ever – I’ve become interested in BTL. An area local to me has 1 and 2 bed flats on long leases with 4% yield after generous provision for all costs including agency fees and voids. Demand from tenants is high. The flats are modern, EPC B, and high spec inside. Should attract professional tenants. More like 4.5% yield if I self managed.
If I wanted to leverage, then the best bet seems to be purchase via a Ltd company, and get a (Ltd co) BTL mortgage at around 5.3%.
My thinking is that this is an approximately RPI linked bond, albeit with terrible liquidity and likely political risk of meddling.
Not going to make me rich, but does seem to provide a useful inflation linked yield alongside my vanguard ETF portfolio. Anything I’ve missed?
@brodes maybe but factor in periodic refurbishment costs, refinancing costs, double taxation and future more onerous taxation.
@Bb limp
I love when you post a load of old cobblers without a shred of evidence to back it all up
In fact when you actually look at what is behind the rise in immigration it is pretty evenly split between a rise in asylum seekers (mostly of the legal kind) and non-EU students (including their dependents)
But never let the facts get in the way of your culture war will you
Source: https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/longterminternationalmigrationprovisional/yearendingdecember2022#:~:text=Total%20long%2Dterm%20immigration%20was,)%20and%20British%20(88%2C000).
@BBlimp #3, @Syrio #4, @Neverland #9: there’s a further flaw of reasoning in #3. EU membership required free moment of people (freedom to establish for workers and their immediate family) only for EU nationals. It did not at all restrict member states’ policies on immigration from “third countries” (i.e. those outside the EU). As an EU member from 1973 to 2020, the UK could, had it chosen to have done so, have permitted fully unrestricted third country immigration. There was neither a legal bar nor an impediment to this from the EU. Rather, the decision not to permit this (whether right, wrong or who knows) was one which was taken in Westminster, not in Brussels.
Off piste but somewhat ironic that whatever side of the Brexit fence people sit, there still seems to be universal agreement that it’s been a mess, even if we can’t agree upon the reasons why exactly.
Why are bond holders happy to lock in yields of 5% anyway with inflation as it is? Either you’re a great optimist and believe the projections inflation will fall a lot and Real Soon Now or you’re running a real risk of locking in a real loss. Perhaps this is why the market isn’t viewing many of these gilts as the great arbitrage opportunities they might seem to be on the surface. I was still surprised (as someone with low single digit millions NW, thanks in no small part to this site) to see six figure sums being bandied about on those gilts quite easily… Cost of living crisis, huh?
Thanks for the other great links too… The Bitcoin theft was especially edifying… Certainly you’re not in danger (yet) of being replaced by an AI!!
Mortgage broking is my “side-hustle” as the kids call it.
Contrary to what most people might imagine, it’s actually something you can carry out sustainably as a self-employed gig, alongside a full-time job, with very low fixed costs. As long as you have a reasonable number of previous clients and you do a decent enough job that your clients will recommend others.
Anyway, I digress. In spite of the periodic complaints about the lack of long term fixes in the UK, there have always been a decent amount of good long term fixes, especially over the last decade.
Prior to everything kicking off with mortgage rates, Kensington (a small lender that is now Barclays owned) offered a cracking product called Flexi Fixed For Term offering rates between 3-4% for fixes between 10-40 years, similar to what was being offered across the pond at the time. The only thing that you couldn’t do without a penalty was remortgaging to another lender, in every other aspect it offered the flexibility to pay it off penalty free or port it if you were moving. Habito offered flexible long term fixes too (they no longer do), but their rates were noticeably higher than Kensington’s.
I thought it was a cracking product, especially for those clients that might be maximising their borrowing and enthusiastically put forward the suggestion to such clients. In almost every case, I could see their eyes glazing over soon as I mentioned a fix longer than 5 years and the rate which was maybe 1-1.5% over the “best rate” available to them at the time.
In spite of my best efforts, I only ever had one client that opted for this product. Personally, as a part-time one-man band, I have more business than I can handle and all through referrals so it doesn’t make the slightest difference to me whether someone opts for a 2, 3, 5, 10 or 30 year fix. I do my best to recommend what’s best for them but the client will decide in the end.
My point is that like our politicians, the average mortgage borrower is pretty short-term in their thinking, poor with numbers, don’t value optionality like they should, and extremely led by recency bias. A few years ago, most clients wanted 2 year fixes because all they’d seen recently was house prices going up and rates coming down. Now, most clients are going for 5 year fixes and in 2-3 years time many of them will either be complaining to me about rates having dropped or complaining about not being able to port / borrow more with their current lender.
As of today, Kensington is offering rates of between 5.5-6.5% for 30 year fixes but it’s close to impossible to convince clients to consider it even though it lets you pay it off penalty free if you move during the term or port it if the rate is worth carrying over.
@JCS #11: “a great optimist and believe the projections inflation will fall a lot and Real Soon Now”: I’ve gone back and forth on this one; first accepting the ‘transitory’ Fed view of inflation in late 2021, then thinking that the MPC may be under reacting and that we could see much higher rates (at least in the UK), next going back to thinking that rates and core inflation are peaking, and now to just being resigned to the uncertainty and to not having a strong directional view.
What I think may have changed though since 2009-2021 is the balance of risk to reward in high quality sovereign bonds.
In 2020 you would have had to have had an outcome of a future of near zero or actual negative nominal rates (and also presumably of very low inflation) for T-Bill and Gilt prices to keep rising and for their yields to keep falling.
That was possible, but it didn’t seem that likely then, and in fact the near opposite has actually occurred. Indeed as far back as 2016 @TA gave this warning on ILG funds:
https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/
From here onwards – and looking out to 2024, 2025 and 2026 – either or both of inflation and rates could certainly keep rising, and Gilt and T-Bill prices would then fall some more at the long end.
However, because starting yields are now an awfully lot higher than in 2020, or for that matter in 2016, the price impact on the long end of going from below 1% YTM for some issues in 2020 to over 5% now is going to be much more than if we now go from 5% to, say, 8% yields.
On the other hand, if we were to see rates and yields fall back to 2%, then there would be a much larger positive move in T-Bill or Gilt prices than the fall in prices that we would see going from 5% to 8% yields.
So there’s arguably now an asymmetric range of outcomes, depending upon whether we get a rate up or a rate down scenario eventuating.
@Simon thank you for the very thoughtful commentary on mortgages. As someone that was told when my wife and I opted for a 15 year fixed at 3.1 percent four years ago that were told by friends and family members that we were either mad, ill advised, or too cautious, I am now feeling rather smug as these same people are all moaning and griping about the rising cost of their mortgages which are now being renewed. I never could quite understand why anyone would want to mess about with what is the vast majority of cases the biggest and most important debt (and assest given its your house) but each to their own.
I have to agree with Simon. The lack of long-dated fixed mortgages is nothing to do with lenders or brokers. In a rate environment that was trending down for over three decades, borrowers simply didn’t want them. We also never developed the mortage-backed security market that the US did in the late 70s and 80s.
Banks don’t really care. If you want a variable rate mortgage, they care about the margin over SONIA they are earning. If you want a fixed-rate mortgage, then they will pay fixed in the swap market, and turn it into a variable rate mortgage with a margin over SONIA. No difference to them, other than the interest rate swap which has a bid-offer of a basis point or two.
Either way, for those of you who remain ideologically opposed to active investment, then I hope you are all on a variable rate mortgages. Any fixed rate mortgage would be a view on interest rates and thus heresy.
@TLI your suggestion that risk/reward favours longer bonds now is implicitly dependent on the assumption that a 3% rise and a 3% fall in interest rates are equally likely. I don’t think this is true. When the BOE sets interest rates I’m sure they take into account the impact it will have on asset prices, so I expect that there will be an asymmetry in interest rate moves that counterbalances the asymmetry in bond price moves due to bond convexity.
I have no clue what interest rates will do in future. My thinking therefore is that since long bonds are more risky than short, I will only hold long bonds if I am getting more yield to justify the risk. Historic data suggests that, on average, long bonds have yielded 1-2% more than short, and currently long bond yields are about the same as short, so I’m staying short (cash in ISAs) until this changes.
We had the joy of remortgaging this month. That was, erm, fun.
Moved from a 3.79% 5yr fix in Q1 2014 to a 2.19% 5yr fix in Q1 2019. From memory there was 1.94% with fees offered elsewhere in 2019 but staying with our provider meant we could move to a rate 1.6% cheaper six months early with no fees. Those were the halcyon days!
So it was time to look again. After discussing with Mrs WCTLF we decided we wanted to pay off a decent lump sum. Provider offered the chance to do this now if we agreed a new mortgage (caveated if we leave for another provider). We opted for monthly reduction rather than term reduction. Previously we’ve always reduced the term and kept the personal pressure up. But university costs are expensive and we want to live a life too! Fully intend to overpay each month but we have the choice. Mortgage has gone from 23.6% LTV to 14.6% and is now <8% of our take home pay.
We opted for a lifetime tracker at 5.79% (interestingly not shown on their website). Comfortable taking the variable risk with a low LTV. Rates could go up further but that would wreak havoc on the masses. We can now overpay by more than the 10% fixed cap you see for most 5yr mortgages. Really didn’t want to get a 2yr fixed, pay a fee and save peanuts.
Why did we pay off a lump sum? We’re within 10 years of retirement. We want choices. We live a relatively frugal lifestyle through choice rather than necessity. Cars are paid off and will be kept. No desire for expensive dining or jet-set holidays. Very comfortable in our own skin I guess. Keeping up with the Joneses? Who?
@Simon #12, seconding @Hak #14: thank you for a fascinating insider view. With only one person opting for a very long rate fix in your experience; it makes one realise how herd-like humans are, how difficult it is to act against a consensus, and how much hold recency bias has – even though rates, markets and economies seem to each tend towards cyclicality, such that the next 10-30 yrs are more likely to be different to the current rate regime than similar.
@Eadweard #16: excellent point on term premium. Presumably the now nearly flat yield curve reflects ongoing recession fears? Ackman’s shorting 30 yr Treasuries as he sees a 0.5% min. term premium (long term average) versus 10 yr (i.e. he’s targeting 5.5% v 5%), against just 0.16% right now.
@ZXspectrum
“for those of you who remain ideologically opposed to active investment, then I hope you are all on a variable rate mortgages. Any fixed rate mortgage would be a view on interest rates and thus heresy”
Rishi Sunak logic on show here. Not everyone in the UK is a hedge fund manager
Most people have fixed salaries with only irregular and small increases so it makes a lot of budgeting sense to fix your largest single outgoing into the medium term
Or Liz Truss happens and you are in the shit
@Time Yes, I broadly concur with your price analysis.
Economically, my comments on inflation were somewhat cynical but we have yet to see a real drop. At the current drip-drip rate of 10-30bps a month falling, it’ll take another 2 years before inflation is near a 2% target. That’s a long fat tail if it plays that way and another 10%+ down in real terms from now. Expensive stuff and fair headwind. The idea that inflation is slowing seems to be a wishful – but hopefully self-fulfiling – prophecy. There is a clear conflict of interest and exploitation for governments here – moderate (mid/high single digit) is serving to backfill fiscal holes – whether caused by mismanagement or misfortune.
This also was hinted at in the IFS report which had a very interesting section on the responses of chancellors over the years to good and bad news, and the asymmetry in responses. Generally “good” news is spent now and “bad” news means a bigger deficit. Any household running its affairs in this manner would be ruined. But it’s a convenient political football. Post-Brexit we’ve certainly seen a fair amount of reactionary politics but interestingly that hasn’t extended to reactionary fiscal policies (yet). I do wonder when/if we will see a race to the bottom on rates again – that is sub 2% interest rates being the norm again or if that will just end up being a curious blip in economic history.
@Simon Thanks for flagging Lifetime fixes – seems interesting – https://www.kensingtonmortgages.co.uk/intermediaries/product-portfolio/residential-lending/longterm-fixed/flexi-fixed-for-term (rates can be found in product guide – currently 6.21% for a 21-25 year 85% LTV fix is not great, but it will be an interesting option when rates drop)
Especially loving the ability to fix for a non-round number of years (say… 13 years) – seems handy!
> that is sub 2% interest rates being the norm again or if that will just end up being a curious blip in economic history.
I hear the wishful thinking, but history does not support sub 2% being the norm, even if we regard history as 30 years, rather than 50.
It must be a good weekend for comments when I even see the house troll fielding some decent, reasonable (and relatively urbane) responses to comments I’d have replied to myself.
Thanks for taking the time all. Apologies also for any difficulties commenting this weekend.
Besides the usual spam-filter issue (just wait if you think your comment has vanished after submitting please, I will usually be along to retrieve it soon…) we had a bunch of database connection issues. Apparently unconnected to our site; an artefact of a sub-optimal hosting arrangement. (Not become a member? Please sign-up so we can transcend such indignities!)
@TLI — I’m inclined to think increasing duration exposure looks a good risk/reward bet here, but then I thought that a few months ago, too soon. @Finumus recently shared that he’s turned up Fixed Income exposure in his family portfolios to ’11’ (of Spinal Tap fame). US retirees can no de-risk their 30 year SWRs with TIPS. Things have changed a lot. Still, timing is ever-impossible.
@Brodes — Interesting, I just can’t make the numbers even half-way work at today’s rates and taxes, at least not in London. Maybe if I was a cash buyer with a 30-year time horizon in need of a hobby. 🙂
@Simon — Thanks for those insights behind the scenes, very interesting. Also I had no idea one could be a part-time mortgage broker! I can think of worse side hustles. How does one get into this?!
@ermine — I read @JCS as saying that sub-2% was indeed perhaps the aberration. I think you’re in agreement there. 🙂
@JCS, @ermine & @TI: I’m trying not to have a view on the immediate direction of rates & inflation & to stick to risk 2 reward. At the moment though the price momentum is quite negative across shares & bonds with risk on/off asset correlation. Playing armchair economist, maybe due in whole or part to new uncertainties over inflation impacts of geopolitics and/or perceived greater resilience, as compared to prior expectations, of the US economy and/or the strong nominal wage growth across much of OECD.
However, going beyond 2020s, I struggle to see how Gov’s can tolerate persistently elevated long term rates. This is where they borrow on the yield curve, after all.
Demographics is destiny and, unless the unexpected happens on productivity, the public finances look grim. The OBR’s July 2023 Fiscal Risks report sees the past, present and future pathways of net public sector debt going from 250% of GDP in 1946, down to 28% in 2000 then up to 89% in 2022, before reaching in 2073 one of 310% (optimistic baseline) or 376% (the scenario in which interest rates adapt to the debt ratio, increasing 17 basis points per 10% increase in the debt to GDP ratio, based upon an October 2022 IMF paper), 385% (the scenario in which health spending has to increase further due to social care needs) or to between 360% and 435% (the baseline scenario adapted for the a range of possible future frequencies and intensities of exogenous shocks like another pandemic, financial crisis or a European war).
The OBR also notes that the UK has the highest proportion by far in Europe of index linked debt, having gone from 10% of the national debt stock in the late 1980s to 25% now, and as compared to 12% in Italy, the next highest.
All of which means, I think, that in longer timelines there’s going to be tremendous pressure on central banks, especially upon the BoE, to keep the long end of the yield curve heavily suppressed, enabling the government to borrow cheaply, and to just use the short end of the yield curve to (try to) control inflation.
No original thinking on my part here. Joachim Klement covered this in recent months.
So, if we see QE and ZIRP redux, then it might next time be targeted at 10, 30 and 50 years duration issues, leaving the 2 and 5 year to track an elevated Base Rate with a suitable term margin above it.
If this scenario ever comes to pass, then there could be some decent (and tax free) capital gains to be had in the very longest Gilt issues. Total guesswork of course, and like everyone else I have no idea at all what will actually happen next, yet alone after that.
IMO, section 4 of the referenced IFS report has a good description of the insidious effect of fiscal drag as it applies to tax/NI thresholds.