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Van

Hedging against rising mortgage rates

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Mortgage rates are currently around record lows, which is good if you are looking to remortgage

 

Does anyone have any thoughts on possible ways of hedging against rising rates over the next year? My current fixed rate expires in August 2013; my fear is that bonds will start to fall and I won't be able to get today's rates when I come to remortgage.

 

So what are possible ways to hedge against this possibility?

 

My thinking is to directly short UK Government bonds. If bonds fall and interest rates start to rise, at least I will be paid on the short position that will offset a more expensive mortgage. Or is it possible/likely that banks will raise their margins and increase their headline rates, even without an underlying rise in UK gilt yields?

 

Shorting builders is another option, but one I am far less keen on.

 

Any other thoughts on how I can play this?

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Here's the bigger context you are facing,,, : Gilt-update : Gilt-shorterTerm

 

 

ukbond.png

 

I think after a test of that 2012 low, it may well be finished

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OK, after some more research, it looks like the best way to do this is through the Short Sterling market:

 

http://www.financial...eadbetting.html

 

This is perfect, as CityIndex cover this market.

 

Now I just have to work out how much exposure I should take on, in relation to the size the mortgage and the interest payments over the expected life of the mortgage.

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http://m.myfinances.co.uk/mortgages/2012/11/21/co-op-unveils-five-year-fixed-rate-mortgage-at-just-2-79

 

The Funding for Lending scheme has sparked off a high street mortgage price war. Quite frankly 2.79pc for 5 year fixed is absolutely ludicrous. 2pc fixed for 2 years are coming onto the market.

 

If you have any current mortgage debt or are planning to take on any future mortgage debt then you would be crazy not to do whatever you can to lock in these insanely low rates.

 

short sterling, Eurodollars and EuroBobl all pricing in current base rates for the next year, and sub 1pc base rate until the end of 2015. With these frankly stupefying assumptions I will go on record here and say that I think this is the single biggest no-brainer out there. It's best risk/reward play I can think of - Half a percent downside max, theoretically unlimited upside.

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From what I understand, it is more a play on the LIBOR rate that on the BoE base rate, and so in theory it could go negative and Short Sterling could trade above 100. How much negative is impossible to say but would be under exceptional circumstances:

 

http://www.wilmott.c...&threadid=92345

http://www.nuclearphynance.com/Show%20Post.aspx?PostIDKey=161099

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So do you have a trade in mind Van? From what I see short Sterling is the interest rate on a 3 month deposit of £500K and presumably there would be a cost attached to rolling?

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So do you have a trade in mind Van? From what I see short Sterling is the interest rate on a 3 month deposit of £500K and presumably there would be a cost attached to rolling?

 

Yeah I'm short on the Euribor contract and building short positions in Short Sterling and Eurodollar through spread bets. The way I see it any of these three areas coils trigger a general rise in rates.

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Here is the historical 3 Month LIBOR rate:

 

hfgrafieklibor-en-1-36.jpg

 

hfgrafieklibor-en-2-36.jpg

 

How much longer can this go on?

It is an absolute certainty that a return to normality will send mortgage rates spiralling, the housing market crashing, and the economy into a tailspin.

 

What would a rise to even 2% do? I don't know the answer to that, which is why I'm taking these precautionary measures.

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