Interest rates down

Press, 29 July 1989, Page 24

Interest rates down

By Richard Boulton, research partner, Hamilton, Hindin, Greene. On the interest rate front, Thursday’s Budget lived up to market expectation. There will be no new money raised by the Government via the bond (Government stock) market or by Treasury bills. This has had an immediate effect on bond yields. Trading overnight on Thursday saw yields marginally lower and the trend continued in the domestic market during Friday. With no increase in supply and a potentially increasing demand, longterm bond yields are expected to fall further in coming weeks and months. This has had a very noticeable effect on the SOE paper — Housing Corporation and Electricorp. Housing Corporation bonds are Government guaranteed and are likely to be a source of increasing issue in time. In the last month their yields have dropped 0.6 percentage points and since ' last week have dropped 0.5 per cent. The fall in Government bonds has been almost as dramatic — the.. benchmark 15/11/93 10 per cent stock has dropped 0.3 per cent during the week. Short-term rates are likely to be the least affected as Government policy works towards inflation of 0 to 28 a year in the next 2-3 years and are likely to remain relatively firm. Because of the inverse relationship between yields and prices, as yields (return on funds) fall, prices rise. The drop in interest rates should boost share prices. Home owners with mortgages should now expect their mortgage rates to drop. The lending fraternity should be left in no doubt as to what borrowers expect: lower mortgage rates. With the Government leading the way much of the lender’s previous arguments for not lowering rates further have been negated.