I: WWI: The 1914 assassination of Franz Ferdinand triggered a series of events that led to the outbreak of WWI. In response, the Dow Jones fell 30%, and bond yields plummeted.
This is known as the “flight to safety,” when investors sell stocks and move to the safety of bonds – with the belief that geopolitical uncertainties make stocks too risky.
And when investors move en masse into bonds, the increased demand for bonds pushes up bond prices, which in turn pushes down yields (interest rates).
II. WWII: In 1939, Germany invaded Poland, causing France and Britain to declare war on Germany. Stocks in America initially rose because war was likely to trigger more economic activity. But then, as things heated up, there was again a flight to the safety of bonds, and rates fell.
III. Ukraine War: When Russia invaded Ukraine in February of 2022, stocks fell and rates plummeted, as investors were very nervous about an escalation. Note: this happened, despite the risk to the oil markets/oil prices, and the potential inflationary impact (important to consider, given what happened today).
Sidebar: JVM’s stock also fell after Russia’s invasion because one of my blog readers gave us a very angry one-star Yelp review for discussing the impact of the Ukraine war on interest rates.
IV: Gulf War: When Iraq invaded Kuwait in 1990, the 10-Year yield fell a full 30 basis points, despite spiking oil prices (brought on by concerns about Middle East oil production getting cut off). Amusingly (given today’s angst about “high rates”), yields fell from 8.5% to 8.2% 1990. Today’s “terrifying high” 10-Year yield is almost 4% lower, at 4.4% – another reminder that today’s rates are not really that high.
V. Hamas-Israel: When Hamas attacked Israel in October of 2023,10-Year yields fell 20 basis points in the aftermath. This was again brought on by a “flight to safety,” as investors were concerned about a possible escalation into a broader conflict.
VI. Israel Attacks Iran: 10-Year Treasury Yields are UP 8 basis today points as I type this blog.
This is highly unusual because, as I pointed out above, there is usually a “flight to safety” after an attack like the one we saw last night.
What Today’s Rate Increase Signals
While, as a mortgage guy, I normally like to see rates fall, today’s rate increase actually makes me happy because it implies that thousands of investors across the planet likely do not believe the war will escalate. If they did, they’d likely be plunging into bonds.
Rates ostensibly rose because the Israel-Iran conflict threatens oil production, and that has already pushed oil prices significantly higher. And that, in turn, is an inflation risk – which pushes rates higher.
This of course begs this question: Why didn’t the Ukraine and Gulf Wars push rates up when they threatened oil prices every bit as much? This makes me wonder if there is more to the picture now than just oil prices.
