Swap rates down following SVB collapse

In the case of Silicon Valley Bank, bad news is good news for mortgage customers. Over the past week or two, we've seen mortgage rates creep up as it was felt the UK economy is doing better than expected, meaning that it was more likely the Bank of England would hike rates. Now that it looks like they perhaps won't have the room to do that, I'd expect to see the upward pressure on mortgage rates ease off a bit.

The reaction in the market to Silicon Valley Bank's collapse has seen swap rates nosedive, with 0.4% off the money market rates since Thursday's close. This could prolong the sub-4% market rates and maybe even trigger a reduction in the base rate sooner than expected. It seems lessons from the past about investment risks and behaviour have not been learned, and since contagion is unpredictable and spreads quickly, we will have to see what the next few days and weeks bring.

Silicon Valley Bank going bust is likely to have focused the minds of the world's central bankers on the dangers of pushing interest rates too high, too fast. The markets certainly seem to think so, with swap rates falling in the immediate aftermath. That's good news for mortgage rates, as the recent increases may now be reversed over the coming weeks. Despite the soothing words from political leaders, fear about major bank exposure to bond price falls is continuing to drive market sentiment. Are we on the brink of a second Global Financial Crisis? I suspect not, but it could mean an emergency brake is applied to interest rate hikes.

The failure of SVB has triggered a series of events, which will eventually trickle down to impact the UK economy. In recent weeks, the US Federal Reserve has come out and openly said they may need to increase rates higher than originally thought and keep them there for longer. This was the nail in the coffin for SVB due to them holding a large number of government bonds, which are negatively impacted when interest rates rise quickly. SVB's failure is rippling around the world and creating fear that other banks may go the same way. The US Fed may now need to rethink if they plan to increase rates, which then takes the pressure off the Bank of England having to follow suit. With a larger increase in the base rate now looking less likely, the markets are repricing accordingly to factor in the changing climate.

As the saying goes, 'When the US sneezes, the UK catches a cold' and the failure of SVB has sparked fears of bank contagion on both sides of the Atlantic. Market expectations for interest rate rises have fallen accordingly with both the US Fed and Bank of England now expecting to slow down or even pause rate hikes.

Financial markets tend to react badly to surprises and have a tendency to over-react, too. The collapse of Silicon Valley Bank in itself is not a major issue for UK markets as a whole, but the fear of a repeat of 2008/2009 is what's setting the background music to all this. Is SVB a one-off, or the first domino to fall? The good news for the UK is that our banking sector is in a far more robust place than it was in 2008/2009 so the fear of UK banking collapses is far less than it is in the US. Chances are that markets will stabilise in the coming days and swaps return to around their pre-SVB levels. But as the saying goes, when the US sneezes...

The troubles we’ve seen with Silicon Valley Bank highlight how fragile things are. The increase in swap rates has certainly changed in the past few days but I wouldn’t bank on it staying that way. So many factors can change the trend at the drop of a hat. It’ll now be interesting to see if the base rate remains the same this month. A rate hike is no longer a nailed-on certainty.

My feeling is that falling swap rates is because of the huge amounts of uncertainty around what will be happening with base rates in the US and UK in the coming months. There are already signs that there may be a softening of future rate rises in the US and this could potentially spread to the Bank of England as well, with the potential for the base rate to come down sooner than had been expected.

Sonia swap rates have crept back down following the collapse of three US banks within five days as investors have shifted their focus to bonds. At times of stress, bonds tend to provide a haven for investors. It will be interesting to see whether the MPC holds, increases or decreases the base rate. I think they will keep a close watch on the financial markets and see how the markets react. I wouldn't be surprised if one or two members have a last-minute change of mind on their voting intention.