The central bank of sterling volatility
The lack of market hedges for prepayment risk has hampered the development of a fixed-rate mortgage market in the UK. Now the UK Debt Management Office may hold the key to opening up the market, through the issuance of gilt options. And UK life insurers could find the product of their dreams
It could be the Achilles heel of the UK economy: the increasing leverage of British mortgage borrowers to short-term interest rates. With rates and unemployment at low levels in recent years, total UK mortgage borrowing has increased to £774 billion, fuelling a bubble in house prices and supporting a debt-fuelled consumer boom.
However, a sharp rise in short-term rates – perhaps caused by a
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