A positive gilt trip for British homebuilders may be short-lived

LONDON, Feb 5 (Reuters) - Britain's homebuilders are on investors' radars this week, with earnings that could give an indication of whether the drop in gilt yields late last year translated into enough of a fall in mortgage rates to grease the wheels of the economy.

Fears that central banks around the world including the Bank of England will keep rates higher for longer, reinforced by last week's policy decisions and data, suggest this will be a bumpy road however.

Big builders reporting earnings include Barratt, Britain's largest homebuilder, Redrow and Bellway , at a time when investors are becoming more optimistic on the sector and would-be homebuyers are finally starting to borrow more.

The FTSE homebuilders index reached an all time high on Friday, albeit before U.S. data sent borrowing costs surging around the world.

The index, which tracks the likes of Taylor Wimpey and Barratt, has risen by around 50% since hitting its lowest in nine years in September 2022.

"With improving mortgage affordability set to drive a housing market upturn and the election likely to provide a more supportive political backdrop, we see the scene set for further upside to forecasts, valuations and share prices medium term," said Jefferies.

Last quarter, major builders issued fairly dire warnings about the 2024 outlook, and Barratt said its annual home building targets would be 20% lower than the year before.

But things started to turn around at the back end of 2023. Five-year gilt yields, which underpin a large portion of consumer borrowing, fell steeply, as investors prepared for the BoE to loosen the reins on monetary policy a bit sooner than many had previously expected.

A measure of home affordability fell late last year to its cheapest since 2015 in real terms, according to home loans provider Halifax.

Recent Bank of England data showed British lenders approved the most mortgages since June last month, while mortgage rates fell for the first time in over three years.

But that could be it for good news for now.

The Bank of England, last week, held rates steady at near 16 year highs, with two policy makers voting for a further increase.

Gilt yields, which rose the most in six months in January, edged up after the decision and then shot up 17 basis points on Friday alone, after stronger than expected U.S. jobs data pushed back expectations of rate cuts in the U.S. and sent bond yields higher around the world.

The move higher in benchmark borrowing costs reduces the likelihood of further large mortgage rate cuts, and British homebuilder stocks dropped on Friday after the U.S. data and again on Monday.

The BoE's rate decision helped the pound, but the U.S. data hurt it more.

It was trading around its lowest in nearly eight weeks on Monday at $1.260, even with five-year gilt yields at three-week highs.

(Reporting by Alun John, editing by Amanda Cooper and Toby Chopra)