I wrote a blog last week about the potential impact that a Russian invasion into Ukraine would have on rates, and it was one of my most viewed blogs ever.
In light of that interest, I am doing a brief follow-up blog to review what actually happened in light of the invasion yesterday.
IMPORTANT NOTE: The invasion itself, the loss of life and its geopolitical implications are extremely serious, and my focus on the financial implications for the purposes of my blogs (which are always apolitical) does not imply that I don’t understand how dire the situation is.
Rates Fell Upon News Of Invasion
Rates did fall significantly at first in response to invasion news just like I predicted in the blog I linked to above, but rates started to edge back up for a variety of reasons.
Competing Narratives – Push Rates Up And Down
Because Russia and Ukraine are such huge players in the world’s energy and commodities markets, the war seriously threatens supplies – which will inevitably push up prices – exacerbating inflation. This of course pushes rates up.
The economic impact of sanctions and the war in general is probably going to be less than anticipated (outside of energy and commodity markets) because the Russian economy is so tiny. Russia’s economy is not even in the top ten anymore, and it is smaller than Italy’s, Brazil’s, and Canada’s. It is only a tad bigger than Florida’s economy in fact. This realization tended to push rates back up too, as we will probably not see that much of an economic slowdown resulting from the war.
FLIGHT TO SAFETY
This is the phenomenon where investors move from stocks to bonds en masse in an effort to find safe-haven investments where they will not lose money – something that happens whenever we see skirmishes or wars start. This is still a factor now and something we saw today even, when investors moved back to stocks when rumors of peace talks emerged. That movement was short-lived, however, when those rumors proved false, investors moved back to bonds, and rates edged back down.
The Fed is a factor too, as always. Some pundits on Twitter yesterday were speculating that the Fed may use the war as an excuse to NOT cut rates as much as they had previously implied a few weeks ago. This has had the effect of pushing rates up ironically because it was good news for stock market investors who love low rates and how they help growth stocks (so investors moved out of bonds and into stocks – which pushes rates up).
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