How resilient are UK corporate bond issuers to refinancing risks?

Laura Achiro and Neha Bora

Central banks in most advanced economies have tightened monetary policy by raising interest rates. Tighter financing conditions may make it harder for some businesses to refinance their debt or could mean they face less favourable terms when they do. This blog explores the extent to which bond maturities could crystallise these refinancing risks. Overall, UK corporate bond issuers appear broadly resilient to higher financing costs, but risks are higher for riskier borrowers particularly if the macroeconomic outlook and funding conditions were to deteriorate.

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Why lower house prices could lead to higher mortgage rates

Fergus Cumming and Danny Walker

Bank Rate has risen by more than 5 percentage points in the UK over the past couple of years. This has led to much higher mortgage rates for many people. In this post we analyse another potential source of pressure on mortgagors: the potential for falls in house prices to push borrowers into higher – and therefore more expensive – loan to value (LTV) bands. In a scenario where house prices fall by 10% and high LTV spreads rise by 100 basis points, we estimate that an additional 350,000 mortgagors could be pushed above an LTV of 75%, which could increase their annual repayments by an extra £2,000 on average. This could have a material impact on the economy.

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How house prices respond to interest rates depends on where they are in the country

Danny Walker

Many people expect the rise in interest rates over the past 18 months to lead house prices to fall. Average prices have already fallen by 1–2% in the UK and by more in the US. In this post I show that historically there have been large differences in how an interest rate shock affects prices in different areas of the country, even though interest rates are determined nationally. House prices respond more to interest rates in areas with more restrictive housing supply, like London and the South East of England. These are also the areas where price growth has been strongest in recent decades.

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Uncovering uncovered interest parity: exchange rates, yield curves and business cycles

Simon Lloyd and Emile Marin

The textbook uncovered interest parity (UIP) condition states that the expected change in the exchange rate between two countries over time should be equal to the interest rate differential at that horizon. While UIP appears to hold at longer horizons (around 5-10 years), it is regularly rejected at shorter ones (0-4 years). In a recent paper, we argue that interest rates at other maturities — captured in the slope of the yield curve — reflect information about the pricing of ‘business cycle risks’, which can help explain departures from UIP. A country with a relatively steep yield curve slope will tend to experience a depreciation in excess of the UIP benchmark, at business cycle frequencies especially.

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There’s more to house prices than interest rates

Lisa Panigrahi and Danny Walker

The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled. Recent commentary on this blog and elsewhere argues that this unprecedented rise in house prices can be explained by one factor: lower interest rates. But this simple explanation might be too simple. In this blog post – which analyses the data available before Covid-19 hit the UK – we show that the interest rates story doesn’t seem to fit all of the facts. Other factors such as credit conditions or supply constraints could be important too.

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All bark but no bite? What does the yield curve tell us about growth?

Carlo Favero, Sebastian Vismara and Iryna Kaminska

The slope of the yield curve has decreased in the US and the UK over the last few years (Chart 1). This development is attracting significant attention, because the yield curve slope (i.e. the difference between longer term government bond yields and shorter term government bond yields) is a popular business cycle indicator, and a fall of longer term yields below shorter term yields (i.e. an ‘inversion’ of the yield curve) has historically been considered as a powerful signal of recessions, particularly in the US.

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Diffraction through debt: the cash-flow effect of monetary policy

Fergus Cumming.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009. Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others. Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009. In this article I explore one element of the monetary transmission mechanism that works through cash-flow effects associated with the mortgage market, and show that it can vary across both time and space.

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Population ageing and the macroeconomy

Noëmie Lisack, Rana Sajedi and Gregory Thwaites

An unprecedented ageing process is unfolding in industrialised economies. The share of the population over 65 has gone from 8% in 1950 to almost 20% in 2015, and is projected to keep rising. What are the macroeconomic implications of this change? What should we expect in the coming years? In a recent staff working paper, we link population ageing to several key economic trends over the last half century: the decline in real interest rates, the rise in house prices and household debt, and the pattern of foreign asset holdings among advanced economies. The effects of demographic change are not expected to reverse so long as longevity, and in particular the average time spent in retirement, remains high.

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Is a steeper yield curve good news for banks? A challenge to the conventional wisdom

Oliver Brenman, Frank Eich, and Jumana Saleheen

The conventional wisdom amongst financial market observers, academics, and journalists is that a steeper yield curve should be good news for bank profitability. The argument goes that because banks borrow short and lend long, a steeper yield curve would raise the wedge between rates paid on liabilities and received on assets – the so-called “net interest margin” (or NIM). In this post, we present cross-country evidence that challenges this view. Our results suggest that it is the level of long-term interest rates, rather than the slope of the yield curve, that drives banks’ NIMs.

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Pension fund deficit risk

Matt Roberts-Sklar

In recent years, the volatility of pension fund deficits has been dampened by pension fund assets behaving more similarly to pension fund liabilities. This is partly because bonds make up a bigger share of assets than a decade ago, and partly because bonds and equities are moving more closely than before. Both factors have increased the correlation of assets with pension funds’ liabilities which tend to be intrinsically bond-like. This matters because the volatility of pension deficits can affect pension fund investment decisions. Given their size, changes in pension fund asset allocation can materially affect asset prices.

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