Wholesale 10 year rates

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lomber

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Wholesale 10 year money market rates have risen to 2 % today. Both Bank of America and Deutsche Bank are predicting 2% ECB by next summer. I would encourage anyone with their mortgage provider if staying and not selling to consider fixing immediately for long term. I fixed with BOI under their 80% LTV last week at 3.3 for 10 years , AIB is 3.2 for 10 also. Last week the 10 year was 1.7 wholesale. This could look very attractive I'm the next few weeks predicting back street lenders to be at 3.6 plus and mainstream to be at 4.5 so likely no point in switching..
You should be able to break a fix at no charge and refix although the short term rates are negative so a small charge may be payable still so check the break cost. I was charged 2 euro by BOI when I paid 10k down to reduce balance with 3 weeks left till 2 year fix ran out! It was -.4 at the time of taking fix and something like -.5 for short term euribor hence the 2 euro cost:)
 
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I can't understand current market pricing. The swap curve is implying many current rates are nearly loss making at this point.
 
NoRegretsCoyote said:
Correct me if I am wrong but I didn't think they did.
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Can you point me to a source for this? Asking genuinely, as I'd be very surprised if they didn't otherwise there are many follow through issues. For example charging mortgage holders ERC break costs on a 100% hedge, where a hedge may nit be for 100% of the balance.
 
unknowninsider said:
Can you point me to a source for this?
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I asked you the question :)

My layman's understanding of banking was that it inevitably involved borrowing short and lending long. You can hedge this all away of course, but then presumably you don't make any profit.

Again my lay understanding is that there is a tolerable level of maturity mismatch between deposits and loans for a supervisor. Even in a full-blown bank run there are many deposits that are very sticky.
 
The profit is through credit risk and net funding spread (funding cost minus hedge costs), as taking naked interest rate risk could be classified as speculation. Which no pillar bank should rely on for profit generation.
 
10 year is 2.05 today. Wrt hedging I'd assume deposit taking banks would sell hedges and not buy them whereas the likes of Finance Ireland , ICS , possibly Avant( although I believe they have retail deposits in Spain) would buy hedges.
 
unknowninsider said:
Can you point me to a source for this? Asking genuinely, as I'd be very surprised if they didn't otherwise there are many follow through issues. For example charging mortgage holders ERC break costs on a 100% hedge, where a hedge may nit be for 100% of the balance.
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In Bank of Ireland's case:
It is Group policy to invest its net non-interest bearing liabilities (or free funds) in a portfolio of swaps with an average life of 3.5 years and a maximum life of seven years. This has the effect of helping to mitigate the impact of the interest rate changes on interest income.
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The estimated sensitivity of the Group’s net interest income (before tax) to an instantaneous and sustained 1% parallel movement in interest rates: +100bps - c. €275m
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Interest rate risk arising on customer lending and term deposit-taking is centralised by way of internal hedging transactions with BoIGM [Global Markets]. This exposure is, in turn, substantially eliminated by BoIGM through external hedges.
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Boi is crazy to be hedging. That's terrible business. As a deposit taking bank operating numerous current accounts that aren't interest bearing surely the risk is minimal
 
Itchy said:
In Bank of Ireland's case:
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Thanks Itchy. Applying this insight to BOI's 4-year 'Green' product at 1.9%. 4-Yr swaps are at 1.65 at the time of writing. Meaning that BOI are going to earn 0.25% p.a. for 4-years on one of these mortgages drawn down today. This net return is before operational costs, risk-weighted capital charges and sales costs are all factored in.

It begs the question - is BOI making a loss on current lending?
 
Before hedging, BOI's funding is dominated by deposits c.€90bn and ECB funding c.€17bn. All cost a fraction of retail rates. A 1% increase in rates, all else equal, increases its income. BOI also paid 103% of par for KBC's trackers.

Bank shares are rising in an increasing interest rate environment. It's not because they are writing loss making business.
 
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BOI's deposits are held with the ECB at the overnight rate of c. -0.5%. The delta between the overnight rate and the cost of deposits is the banks 'funding spread'. So deposits are currently costing them 50bps per annum which they pay to the ECB.

I didn't say it was a loss making business, I was asking whether current lending is loss making. Which I think it might be based on the numbers I presented.
 
Not sure I follow the significance of the spread over 10Y Swap rates and 4Y fixed mortgage (0.25% pa) and the implied profit margin? Haven't funding costs stayed more or less consistent since YE2021 (will likely change today!)?

On an aggregate basis in 2021, BoI's gross yield was 3.04% with a NIM of 1.86%, implying a breakeven rate of 1.18%.
 
Itchy said:
Not sure I follow the significance of the spread over 10Y Swap rates and 4Y fixed mortgage (0.25% pa) and the implied profit margin? Haven't funding costs stayed more or less consistent since YE2021 (will likely change today!)?

On an aggregate basis in 2021, BoI's gross yield was 3.04% with a NIM of 1.86%, implying a breakeven rate of 1.18%.
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10y swaps were not mentioned. Banks purchase swaps directly relevant to the fixed rate period they are hedging (e.g. 4 year mortgage is hedged with a 4y swap). NIM is an important metric but that is aggregate across all of the banks lending. Variable rate funding has stayed flat, reflected in SVR's remaining unchanged but the cost of issuing fixed rate mortgages has increased by almost 200bps since December.

So for the avoidance of doubt, I'm questioning the banks current point in time lending practice. Mortgages being drawn down today are unlikely to be profitable for the banks.. it seems like a risky move for the banks to make given their importance for the future economy.
 
The idea is to hedge the floating cost of funding? Is this how it roughly works?

BoI receive: 1.9% fixed from customer
BoI pay: 1.65% fixed
BoI receive 1.65% floating

Cost of funding: 0.5%

Gross margin is: (1.9% - 1.65%) + (1.65% - 0.5%)
 
Itchy said:
The idea is to hedge the floating cost of funding? Is this how it roughly works?

BoI receive: 1.9% fixed from customer
BoI pay: 1.65% fixed
BoI receive 1.65% floating

Cost of funding: 0.5%

Gross margin is: (1.9% - 1.65%) + (1.65% - 0.5%)
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I don't see it that way. Below is how I understand it to work.

At present, EURIBOR is -0.30%.

Asset.
BoI receive: 1.9% fixed from customer

Liability.
BoI pay on hedge: 1.65% fixed (edit. 4yr swap now at 1.78% post the ECB annoncement).
BoI receive from hedge: -0.30% floating (current EURIBOR)

Gross lending margin: (1.9% - 1.65% + -0.3%) = -0.05%

BOI Net Margin= net lending margin - cost of funds (from annual report).

-0.05% - 0.04% = -0.09%.
 
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unknowninsider said:
BOI's deposits are held with the ECB at the overnight rate of c. -0.5%. The delta between the overnight rate and the cost of deposits is the banks 'funding spread'. So deposits are currently costing them 50bps per annum which they pay to the ECB.

I didn't say it was a loss making business, I was asking whether current lending is loss making. Which I think it might be based on the numbers I presented.
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This statement sort of implies that BoI place all of their customers deposits on deposit wit the ECB.

I suspect that is false.

The main use of the customer deposits is to finance their lending.

I will check their Annual Report.
 
Customer deposits are 93bn.

Lending to customers is 76bn.

There are surplus deposits, as expected, so some is held with the ECB = 31bn
 
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