Swap rates headed south

If there was one ray of sunshine from the Budget, it's that the markets have reacted positively. As a result, traders are betting on further rate cuts, which could bring down the cost of mortgage borrowing even further. Luckily we avoided a 2022-style meltdown on this occasion but it’s not over yet. SWAPS may be falling but unemployment is rising and sentiment in the business community has been shattered.

We saw swaps fall quite noticeably after the Budget, and that’s usually the first sign that lenders may have room to sharpen their pricing. Over the past few weeks a few lenders have already nudged rates down to try to wake up what’s been a very sluggish market, so the direction of travel is clear.

If swaps keep drifting lower, I’d expect more lenders to follow with further cuts, but probably not all at once. Each lender reacts at their own pace depending on their funding position and how much business they want to bring in.

Since the speech I’ve seen some early movement, but nothing dramatic yet. TSB have announced rate drops of up to 0.10% on product transfers and additional borrowing this morning. My sense is that we’re in that familiar ‘wait-and-see’ window where lenders watch swaps for a day or two before pulling the trigger.

Overall, the mood is more positive than it has been for a while, there’s definitely potential for cheaper fixes if the current trend holds.

The Budget may have battered business owners but borrowers appear to have come through relatively unscathed. In fact, they may have reason to cheer as SONIA swap rates edged south in the aftermath of the Budget. So the rate-cutting trend of recent weeks may continue. SONIA swap rates dipping slightly implies, to an extent, that the Budget's impact was already priced in by markets. All the more so if they had a leaked copy of the OBR report before the Chancellor rose at the dispatch box. The future direction of SWAP and mortgage rates hinges on whether markets, having fully digested the Budget small print, see the fiscal measures announced Wednesday as aiding or harming the disinflationary trend. If frozen tax thresholds reduce disposable income and minimum wage hikes increase business costs, that could prove disinflationary. This could make a pre-Christmas cut at the Bank of England more likely, which will be a boost for borrowers.

The Budget didn't spook the markets as some feared, and swap rates sliding south yesterday suggest we might be in for more rate cuts from lenders. TSB has already dropped rates by up to 0.10% on product transfers and additional borrowing this morning, and if swaps keep falling, you can expect other lenders to sharpen their pencils too. The positive market reaction means traders are betting on further Bank of England rate cuts, which should translate into cheaper mortgage deals for borrowers. However, caution is warranted. Rising unemployment and decimated business confidence could dampen the property market recovery, even with lower rates. Keep watching those swap movements closely over the next few days.

Initial market reaction to the Budget has been reasonably positive, with both SWAP rates and Gilts falling further. There is definitely potential for cheaper mortgage rates on the horizon if that position holds. With Stamp Duty untouched, buyers will be back in the property market looking to find their new abode, and those needing to refinance will be buoyed by cheaper rates, many saving up to 2% on equivalent deals from this time in 2023. The prospect of cheaper mortgage rates is probably the only good thing to come out of the Budget yesterday.