Geopolitical Strife & Interest Rates; “Flight to Safety;” Trends
After I heard the news of the Iranian missile attacks against U.S. bases in Iraq, I 100% expected rates to be significantly lower this morning.
And, I was 100% wrong.
Rates are holding relatively steady.
SKIRMISHES, WARS AND “FLIGHTS TO SAFETY”
Typically when there is significant geopolitical strife (wars, skirmishes, threats of war) of any kind, rates drop, particularly if the U.S. is involved in the skirmishing.
One of the reasons rates drop is that investors move funds en masse from riskier investments like stocks to “safe havens” like U.S. treasuries and gold (the increased demand for treasuring pushes treasury bond prices up and rates down).
This is known as a “flight to safety” or “flight to quality,” and we’ve seen it many times over the years in response to all kinds of skirmishes, including the Bosnian crisis of the mid 90’s, both Iraq wars, 9/11, Russia’s invasion of the Crimea, and numerous other situations.
We did not, however, see a rate reduction this morning for several reasons:
- Markets responded already: The markets had already responded to last week’s killing of Iranian General Soleimani, pushing rates to their lowest level since early December (where they remain).
- Attack not as serious as initially thought: Last night’s attack was less serious than initially thought, as there have been no reported casualties.
- Flight to safety offset by good news: There was still a flight to quality to some extent but it was offset by substantial “good economic news” (that usually pushes rates up). This news included strong manufacturing index, employment and trade deficit numbers.
- Oil prices: Skirmishes in the Middle East have the added concern of pushing up oil prices, but this is much less of a threat to the U.S. economy nowadays in light of the fracking revolution and the U.S.’s near independence when it comes to oil supplies.
TRENDS – RATES UP IN THE NEAR TERM
Once again, rates are expected to trend up over the next several months.
This is b/c “flights to safety” are often short-lived; we are still experiencing lower rates than we’d otherwise be seeing b/c of the skirmishing but this will most likely soon dissipate.
But, more significantly, as I have mentioned more than a few times recently, pending trade deals and very strong economic numbers overall will very likely continue to push rates up over the next several months.
So, I will repeat something else I say all too often.
Buyers and borrowers should get in while the gettin’ is good.
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