Collapse of Silicon Valley Bank sees swap rates fall by 0.4%


The collapse of tech-focussed Silicon Valley Bank (SVB) has seen swap rates “nosedive” with 0.4% off the money market rates since Thursday’s close.

Since October last year, mortgage rates have been gradually coming down.

In a LinkedIn post, LIFT-Mortgages managing director David Baker explains that this has slowed in the last two weeks and a few lenders have increased rates for new borrowers.

For example, Accord Mortgages lifted home loan rates for new customers by up to 40 basis points on 10 March while Nationwide made increases across selected fixed-term and tracker new business and switcher products on 3 March.

At the end of February, Clydesdale Bank also withdrew deals and increased rates for new customers.

With the failure of SVB in the US, Baker comments: “Sonia rates have fallen by almost 0.40% so far which is great news for borrowers as the costs of banks swapping money is a lot cheaper today than it was late last week.”

“The reason for this drop is fairly simple. The market has been pricing in a series of possible base rate rises throughout 2023 and there was uncertainty around the pending Monetary Policy Committee (MPC) decision later this month.”

The Bank of England’s next MPC meeting is scheduled for 23 March.

He says: “As there is a clear stress in aspects of the financial sector now is unlikely to be a time when central banks (especially the Fed) can look to increase rates further and that brings a calmness to the market.”

“My gut feeling is we should see some cheaper rates incoming in the future off the back of this news if swap rates can remain at this level (or hopefully go lower).”

With swap rates falling, Clayhall Financial Services director David Conway suggests that sub-4% market rates could be “prolonged” and could “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.”

While EHF Mortgages managing director Justin Moy says the collapse of SVB could bring forward reductions in the base rate, he doesn’t believe it will have an immediate effect.

However, Moy suggests “the peak may come sooner than expected”.

He comments: “The overnight swap rates showed a significant decline in light of SVB’s collapse, enough for everyone to take notice, especially when the recent trend has been upward for a few weeks.”

“Is this just a bounce for a few days, or have the markets had a little nudge in the ribs? Let’s see what happens for the remainder of the week. It could be significant.”

Meanwhile, Dimora Mortgages director Jamie Lennox highlights that the failure of SVB has “triggered a series of events” that will eventually trickle down to the UK’s 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.”

Carl Summers Financial Services financial adviser Scott Taylor-Barr says while this event “is not a major issue” for UK markets as a whole, he highlights the “fear of a repeat of 2008/2009 is what’s setting the background music to all this”.

Taylor-Barr explains: “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.”

South Coast Mortgage Services director Gareth Davies adds: “The troubles we’ve seen with SVB 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.”

Yesterday, it was announced that HSBC had acquired SVB for £1.

The move comes after the US’ then-sixteenth-largest bank was shut down by California regulators on Friday 10 March after investors withdrew money en masse.

It was the largest bank failure since 2008 and the second-largest bank failure in US history, with the firm having $209bn in assets – and £151.6bn of this being uninsured.

The bank’s interest on this side of the pond amounts to circa £5.5bn of loans and £6.7bn of deposits spread across over 3,000 business customers.

HSBC said it will update shareholders as to the acquisition on 2 May within its first quarter results.

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