Rates Drop Sharply In Response To Russia/Ukraine Tensions
Interest rates were trending upward before news surfaced that NATO believes Russia is still likely to invade Ukraine (because so many Russian troops are amassed at the border).
When the news surfaced, rates dropped sharply in response. This is such a good example of how overseas geopolitical tensions impact the mortgage and real estate worlds that I had to blog about it.
As most readers probably know, Russia has amassed a sizable number of troops on the Ukrainian border and has been threatening an invasion for a variety of reasons. I won’t discuss the reasons in this blog (for brevity’s sake), but here is an excellent BBC article explaining the origins of the conflict – for those of you who desire more info.
Why Wars Lower Rates
Stock investors seek “certainty” and wars and skirmishes create uncertainty because nobody knows what the impact of a war might be. So, stock investors will move to bonds when there is a threat of war – to avoid losing money. And when investors demand more bonds (mortgage-backed securities or Treasuries), the price of those bonds goes up and yields (interest rates) fall.
A Russia/Ukraine war, in particular, would result in economic sanctions and much turmoil and in the energy and commodity markets (that are heavily supplied by Russia and Ukraine) – and that would no doubt slow economic growth.
Stock prices reflect the likelihood of continued growth for the businesses behind those stocks. And, if economic growth overall is expected to slow, most businesses will be expected to grow more slowly (or not at all) too. And this is another reason why investors will move from stocks (before prices fall) into the safety of bonds – when a war threatens economic growth.
Putin/Russia Can’t Afford To Invade
This is a point Holman Jenkins, Jr. made in the WSJ today, and it was so interesting that it was another major reason I wanted to blog about this topic.
Jenkins’ made the point that even though Ukraine supplies an enormous quantity of valuable commodities (mostly agricultural), it provides very little tech or information-age products to the world. And – in today’s world, information is infinitely more valuable than commodities (unlike in the pre-WWII days when Japan attacked the U.S. largely because we restricted its access to commodities). (As a sidebar, this is partially why Taiwan is so coveted by China, as Taiwan is a technology powerhouse in many ways.)
So, because invasions are so ridiculously expensive and because Putin has so little to gain by invading, he simply can’t afford it.
If he does invade, per Jenkins, it will likely lead to his downfall.
Jay Voorhees
Founder/Broker | JVM Lending
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