EURIBOR

Almost as if to prove Disraeli’s dictum that there are “lies, damned lies and statistics”, asking prices for homes on sale in Britain are said to have risen by 1.2 per cent last month, a figure that you might think shows the property market bouncing back at last. In which case, you should think again.

According to Rightmove, the property website, which revealed the increase, it is down not to a much-wanted revival but to a burst of “false optimism” among those marketing their properties and a chronic shortage of new homes coming on to the market.

In the past four weeks 45 per cent fewer properties were put up for sale than in the same period last year – 75,140 new homes, compared with 137,442, Rightmove found. The website said that this lack of competition had prompted sellers and agents to become more bullish by raising asking prices, despite predictions that house prices have a further 10 per cent to fall.

Asking prices recorded by Rightmove increased from £213,570 in January to £216,163 this month, compared with an average sales price of £184,333, according to the Centre for Economics and Business Research. Asking prices in London rose by 0.3 per cent, from £386,653 to £387,988. Rightmove said that national asking prices were down by 9.1 per cent on average over the year – the biggest annual fall it has ever recorded – but noted that properties are selling once 25 per cent has been knocked off the peak price.


Miles Shipside, director of Rightmove, said: “A lack of fresh stock leads some agents to suggest a more optimistic initial asking price, influencing a seller to give the most bullish estate agent the instruction to sell. This is a traditional tactic employed at the start of every year to attract fresh stock, but is a shortsighted move for both parties in a falling market.”

House prices have fallen by an estimated 17.2 per cent over the past year, according to Halifax, making property more affordable for those with enough cash. Figures from Hometrack, the property market research group, suggest that these house price falls have made it easier for some homeowners to trade up to a bigger property. For example, the gap between the average cost of a three-bedroom semidetached home and a four-bedroom detached property has narrowed by 10 per cent, Hometrack said. However, estate agents have reported that many keen buyers are not able to take advantage of lower prices because of a lack of mortgage finance.

Mr Shipside said that supply constraints were expected to ease as more and more “distressed” sales go to auction. Auction rooms are expecting an influx of new properties as the number of repossessions rises and lenders try to sell the homes on. Figures from Eigroup, the property auction company, showed a 22 per cent rise in the number of lots coming to auction in the past 12 months. The Council of Mortgage Lenders said that repossessions were expected to rise from about 45,000 last year to 75,000 in 2009.

Mr Shipside said: “Repossessions are still concentrated in relatively few areas of the country, though record numbers are rumoured to be in the pipeline, with some auction houses scheduling several ‘pile them high’ auctions.”

One focus for bargain-hunters today will be Savills residential auction. Lots include a seven-bedroom detached house in one of the best parts of Putney, southwest London. The property, which requires “complete upgrading”, was for sale at £2 million a year ago, but the auction guide price is £850,000.

Also being offered is Sleddale Hall, a remote farmhouse near Penrith in Cumbria, which became famous as Crow Cragg, the house of the lecherous Uncle Monty in Withnail and I, the 1987 cult movie. The guide price is £145,000. Kate Moss and Sir Philip Green are said to be interested in turning this rundown rural spread into an artists’ colony. However, fans of the film want to bid and have been trying to scrape together the cash through their website at saveunclemontys.org.

The cost of servicing the national debt continues to rise with investors becoming increasingly concerned at the possibility Ireland will default on its soaring debt pile.

And as government debt continues to surge, the slowing euro area economy has fuelled speculation that ECB lending rates will fall again. This rate speculation yesterday helped drive the key three-month inter-bank lending rate or Euribor to a record low.

With the Government, through the National Treasury Management Agency set to borrow some €15bn this year and take the total national debt towards the €70bn mark, investors yesterday drove up the cost of products used to insure against a default on Irish borrowing.

The cost of insuring against a default in Irish Government debt has now risen by 0.95pc in the past week with analysts lumping Ireland in with other European countries deemed to be a concern for investors.

Traders said yesterday that Ireland led a surge to record levels in the cost of insuring against a default on government bonds on concern the high price of bank bailouts and economic stimulus packages will strain public finances.

Higher debt default costs ultimately feed through to higher debt costs as investors look for better returns on riskier bonds or government debt.

A debt default by several euro-region countries has become more likely as nations struggle to finance the cost of bank bailouts and rescue packages, ING Groep analyst Carsten Brzeski said.

Risk

Investors are most concerned about Ireland and Greece, and may start assessing Portugal, Spain and Italy, Mr Brzeski, a senior economist at ING in Brussels, wrote yesterday.

"These countries have been hit hard by the financial crisis," Mr Brzeski wrote. "The risk of a sovereign default seems to be more reasonable. Many euro-zone countries will now finally get to learn the hard way why sustainable public finances are necessary." The outlook on Ireland's AAA credit rating was cut to "negative" from "stable" last month by Standard & Poor's and Moody's Investors Service. Greece had its credit rating lowered one step to A- by S&P, the lowest among the 16 euro nations.

Credit-default swaps on Irish government bonds jumped 95 basis points to a record 355 basis points or 3.55pc, the most of any euro area country. This rate compares to 265 basis points on products insuring against a default by the Greeks.

Part of the problem is the government bank guarantee scheme -- the debts held by Irish financial institutions are more than 11 times the size of the economy, according to BNP Paribas SA. "The biggest budgetary offenders are facing a difficult future," Mr Brzeski said.

International investors are concerned not just by the domestic picture but the entire euro-region economy which contracted by 1.5pc or the most in, at least, 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to an all-time low next month.

The ECB will cut rates by at least half a point next month and may have to consider something even more radical. The euro interbank-offered rate, or Euribor, for three-month loans fell to a record low of 1.94pc on speculation the ECB will reduce its key rate next month.

Following the recent economic downturn many French property owners are looking to free some cash they have locked within those properties...

Remortgaging is the option some have taken to release cash to inject into their UK properties, bringing down their loan-to-value ratios, especially if they’re hoping to switch to a new mortgage deal. Within the market selected financial companies are now offering rates from around 3% on French properties.

Others may simply want to switch their overseas mortgage to a significantly cheaper rate and benefit from lower monthly repayments.

Another benefit of remortgaging an overseas property is that it’s possible to reduce your inheritance tax liability. In certain countries (subject to local tax legislation) such as France and Spain, it may reduce your liability as there is a debt/bigger debt on the property.

The fall in inter-bank lending rates continues: the three-month Euribor, on which rates of interest for mortgage loans are based, has fallen below 2 pct, its lowest since April 2004. The three-month rate has fallen to 1.989. The one-week Euribor has fallen to 1.382 pct, well below the 2 pct set by the ECB. The six-month rate is also sliding; at 2.069 pct it hits its lowest point since April 2004.

   
The main indicator European mortgage, the Euribor has now lost the level of 2.2% to 0.77% drop, which stands at 2192%. This latest cut takes the average of February, which are revised mortgages up to 2228%, its lowest level since October 2005.

The Euribor is still down for the joy of the mortgage. Yesterday, a day after the European Central Bank (ECB) decided to keep interest rates at 2%, but fell in the daily rate up to 2209%. Continue, it is possible that at the end of the month has been matched with the official price of money in the euro zone, analysts were expecting something to happen by mid-year.

After five days of trading, the monthly indicator which are referenced by the majority of mortgages granted in Spain and is positioned in the 2235%. The monthly average is to be taken into account when reviewing the loan.

Closing the month around 2%, down from 2.6% in January, half a mortgage of 150,000 euros to a repayment term of 25 years and a spread of 0.50 points over the Euribor was cheaper by about 200 per month, which would mean a saving of 2,400 euros a year.

Mortgage rates started to fall on October 10, two days after the world's major central banks decide in unison, reduce interest rates to the worrying situation of the financial system.

The Euribor has maintained since its downward trend, which has been strengthened thanks to the successive decreases in the price of money applied by the European Central Bank (ECB), the latest being in January, and the measures put in initiated by the countries of the European Union (EU) to increase the liquidity of banks.

The Spanish Mortgage Association (AHE), which represents banks and savings banks, estimates that the financial burden of Spanish families mortgaged fall this year at least 20% over 2008 supported by the decrease due to the Euribor.

By Jim Robinson

Last year was one of the most brutal in history, according to Ralph Gasser, fixed income product specialist at Julius Baer.

It should come as no surprise, then, that Julius Baer's €2.4bn (£2.2bn) Absolute Return Bond fund should have suffered.

Although the fund has largely succeeded in beating three-month Euribor by 2-3 per cent a year since it was launched in April 2004, it missed that target last year.

"Last year was tough for relative-value trades because there was such a big dislocation in the pricing of cash securities relative to derivatives, specifically post-Lehmans default," Mr Gasser says.

"It's normalising somewhat now, but in 2008, with liquidity drying up, cash bonds - which are at least two-thirds of the portfolio at any given time - significantly underperformed synthetic or derivative products, through which we are allowed to run shorts.

"On our long/short allocations, the shorts were more liquid synthetics, while the longs were on the cash side - the longs underperformed the shorts."

Consequently, the fund fell by approximately 2 per cent. And while that would have been a top-quartile performance against long-only peers, Mr Gasser concedes the return will be cold comfort for some investors.

Another factor, he says, has been the "generally negative tone" toward absolute-return funds. In 2008, investors began to "question the very rationale" behind the strategy, pulling money out - over the period, the fund's assets more than halved to €2.3bn.

Nonetheless, Mr Gasser remains optimistic for the year to come. "We are still on track to move back toward the defined-return target", he says. "It will take a bit of time, but we are confident we will get there."

The Absolute Return Bond fund, a Luxembourg-domiciled Sicav, employs similar techniques to Julius Baer's fixed income hedge funds, with the exception that the fund, being a Ucits III vehicle, cannot short cash securities or take on leverage.

The fund is managed by fixed income boutique Augustus Asset Managers, with all 16 portfolio managers contributing ideas to the portfolio.

"That approach is very much reflected in the fact that, since launch, we have consistently made money across cycles in all our sub-strategies, including interest rates, currencies, credit and equity-linked," Mr Gasser says.

That, combined with the managers' ability to be "very alert to sharp swings in market sentiment", should stand the fund in good stead.

"There will probably be more short-term moves in portfolio characteristics because the ability to react quickly to short-term changes in markets is what is going to dictate success to a large extent this year. Market technicals are likely to move very fast in 2009."

That trend, where markets are driven mainly not by fundamentals but by technicals or sentiment - such as the repatriation of money back into US dollars - is likely to prevail in 2009, Mr Gasser adds.

"A lot of these themes - probably in the other direction - will play out again, so being able to react quickly to short-term changes in market conditions will be extremely important. It's going to be a relatively volatile year, but then, that typically plays into our hands."

In its latest attempt to shore up the ailing UK economy, the move by the central bank brings the total amount of cuts since October to a massive 400 basis points. That, along with the weakness of the pound and slowing inflation, should provide a significant boost to activity.

On the continent, the European Central Bank left its main refinancing rate untouched at 2 per cent, as widely expected.

But European Central Bank president Jean-Claude Trichet paved the way for another cut in official interest rates next month, saying that rates had room to fall amid signs of weakening inflation and "persistent weakness" in economic activity in the months ahead.

The British Government has also cleared the way for the BOE to buy securities issued by banks and businesses, increasing the money supply, if it feels such a move is necessary to prevent inflation from falling sharply below its 2 per cent target.

In a statement accompanying the decision, the BOE’s Monetary Policy Committee said while rate cuts to date will have a significant impact on monetary conditions, it has seen a substantial risk of undershooting the inflation target in the medium term.

"Output dropped sharply in the fourth quarter of 2008 and business surveys point to a similar rate of decline in the early part of this year," the MPC said.

"Credit conditions faced by companies and households have tightened further.”

Of the 15 economists surveyed by Dow Jones Newswires last week, 13 had forecast that the MPC would cut to 1 per cent. Two had expected a full percentage point reduction to 0.5 per cent.

The ECB’s Mr Trichet warned that demand for exports had been waning faster than anticipated, and that risks to economic growth were on the downside even after a "very negative" fourth quarter in 2008. Financial conditions remained tight in the 16-member currency union, he said.

Inflation was declining rapidly, but was expected to rise again later in the year, Trichet said.

The outlook for price stability was "surrounded by uncertainty" but inflation expectations appeared anchored at present, Mr Trichet said.

The ECB was "monitoring very closely" all developments, he said.

Mr Trichet's references to weak exports and a long stretch of weak economic activity "are all new and give a dovish flavour," said Aurelio Maccario, chief Eurozone economist for Unicredit.

“The statement confirms that a 50 basis-point rate cut in March is absolutely in the pipeline."

Slower inflation should give the ECB sufficient leeway to cut in March, economists said.

The annual inflation average for the 16 countries sharing the euro fell to 1.1 per cent in January from 1.6 per cent in December, well below the ECB's comfort zone of just below 2 per cent.

The consumer price index is likely to fall further in the first half of 2009, reversing last year's oil-price driven spike to rates of up to 4 per cent.

Markets have already priced in expectations for more ECB rate cuts as Euribor rates for maturities of up to three months, a measure of short-term interbank lending rates, show.

The key rate Euribor three months went down on Thursday and stood at least five years.

The rate at three months, traditionally the main benchmark for interbank loans, fell to 2039 percent since 2053 percent, the lowest level since April 2004.

The rate fell to a week to 1399 percent since 1406 percent, well below the ECB's main rate of two percent.

The Euribor also fell to six months, andalusia percent 2127 percent since 2143, interest lowest since July 2005.

The ECB announced Thursday its decision on monetary policy and provides that the entity maintaining the reference rate at two percent.

The rates were to one day a spread of 0.95 / 1.10 percent at 10:13 GMT, compared with half of 1201 on Wednesday percent.

Euribor rates are fixed daily by the Banking Federation of the European Union.

 Banco Sabadell SA won’t use an option to redeem a subordinated bond issue because it would be too expensive to refinance the debt, echoing a decision by Deutsche Bank AG in December.

The market for subordinated bank debt was roiled when Deutsche Bank passed up a chance to redeem 1 billion euros ($1.3 billion) of notes, paying a penalty rate instead. The decision surprised bondholders because borrowers are expected to repay callable notes at the first opportunity and the securities are valued on that basis.

Banco Sabadell, the largest commercial bank in Spain’s Catalunya region, will pay penalty interest of 95 basis points more than the euro interbank offered rate on the bonds after Feb. 18, the bank said in a statement today. The bank currently pays three-month Euribor plus 45 basis points on the 300 million-euro so-called lower-Tier 2 notes.

“This could be a major event if other banks decide to go down that road,” said Andrea Cicione, a strategist at BNP Paribas SA in London. “As soon as two issuers start to do it, a third can do it and it becomes a precedent.”

Banco Sabadell’s bonds due February 2014 fell 6 cents on the euro to 77, according to HVB eTrade prices on Bloomberg. The bonds were at 97 cents in December. The bank has the right to call the notes every three months from February, according to data compiled by Bloomberg.

Average Yield

Fixed-rate, lower-Tier 2 bonds yield about 7.98 percent on average, according to Merrill Lynch & Co.’s Euro Sub-Debt Lower Tier 2 Index.

Banco Sabadell’s notes currently pay a coupon of 4.673 percent, which will fall to about 3 percent after it resets to the new rate, Bloomberg calculations show. The current level was set in November, when Euribor averaged about 4.23 percent. A basis point is 0.01 percentage point.

“In today’s markets it does not make financial sense to call debt which would otherwise be replaced at a significantly higher cost,” Banco Sabadell said in a statement today. That’s “reflected both in the market’s current valuation of the instrument as well as the recent decision taken by other financial institutions in a similar situation,” the bank said.

Regulatory Requirements

European banks use the market for bonds with call dates to meet regulatory reserve requirements, known as Tier 1 and upper- and lower-Tier 2 capital. Lower-Tier 2 bonds are the most senior of these types of subordinated instrument and rank after senior notes and loans for repayment in a bankruptcy.

The Spanish bank this week sold preferred shares, which lenders also use as capital, through its branches to individual investors. The securities pay 6.5 percent for the first two years and then switch to three-month Euribor plus 250 basis points.

Banco Sabadell’s decision not to call the bonds “could lead to repricing of the lower-Tier 2 sector, though most of the extension risk seems to be already priced in,” said Cicione.

Credit-default swaps on Banco Sabadell rose 14 basis points to 304, the highest level in four months, according to CMA Datavision prices at 3:45 p.m. in London.

Default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt, and an increase signals a deterioration in perceptions of credit quality.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Banco Sabadell was due to hold a conference call with investors today, according to the statement.

The cost of three-month dollar loans between banks rose Monday to the highest level since Jan. 9 on worries that a deeper economic downturn will keep the financial sector under pressure.

The rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — rose 0.05 percentage points to 2.23 percent, according to the British Bankers' Association. Since the start of the year, decreases in the rate have leveled off and become increases as concerns about the banking sector re-emerged.

The equivalent rate for pounds fell to a new record low of 2.16 percent from 2.17 percent Friday.

The rate for three-month loans in euros — known as the European Interbank Offered Rate, or Euribor — decreased to 2.08 percent from 2.09 percent on Friday.

Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals. Rates shot higher during the financial crisis as banks hoarded cash and worried that other lenders might collapse and not pay them back.

All three lending rates remain well above the benchmarks set by central banks — of 0-0.25 percent in the U.S., 2.0 percent in the 16-nation euro zone and 1.5 percent in Britain. Wide spreads, or differences from benchmarks, is a sign of distress in the financial system.

However, they have mostly fallen since the autumn after massive intervention from governments and central banks — which on top of the latest fiscal stimulus plans included trillions of dollars in bank debt guarantees, pledges to rescue ailing banks, liquidity injections by central banks and interest rate reductions.