Taoyuan Nights

This is for those of you whose hearts don’t leap with joy at the mere thought of calculating the implied market expectations of future rates. Basically it’s an easy way to get access to market prices for future lending rates. In other words: what are the banks ‘betting’ that interest rates will be in the future?

http://www.swaprates.co.uk

If it says ‘UK 1 year 6.2%‘ (as it currently does) then that means, the billions of pounds slushing around in the futures market has been (on average) bet upon the outcome of ‘we think interest rates will be 6.2% in June 2008′. The site provides US, EU and UK rates over a number of different timespans.

It’s not completely accurate - for 2 reasons. Firstly it’s just the average of what bankers are estimating and staking their money on, and they are ultimately only human. Secondly, there is a little bit of ‘margin’ built into the system. You are rewarded, in other words, for being prepared to lend based on your guess of a future rate. So 6.2% probably really means about 6.1% to 6.15%.

You can see how the market’s views are changing too, using the visualisations on this site. Just now, people are getting pessimistic about international rates - fast! They are beginning to think that rates will rise much further than has been talked about in the newspapers.

Changing subject: I always wonder why people depend on the newspapers for expectations of future interest rates/mortgage rates. Remember that the majority of newspapers are in the business of telling people whatever they want to hear. If their finance writers were actually any good with money, why would they still be working for a newspaper, rather than sunbathing on a nice tropical island?

Picture liberated from inmannews.com.

In summary: Futures markets are in the business of accurately estimating future economic data; they have billions of pounds on the line. I would therefore encourage you to pay rather more attention to this swap rates site, and rather less to the front pages of tabloids, if you are curious about what may happen to mortgage costs or cash savings in the future.

I hope you find this useful.