Over the past week or so, there have been hawkish rumblings of a U.S.-led military strike in Syria, whose government allegedly used chemical weapons on its own people.
Defense Secretary Chuck Hagel indicated that his crew is “ready to go,” with the “assets in place” to carry out whatever is asked of them.
Unfortunately, war, or even a military strike, is not without its consequences, and if we do attack Syria, there’s a good chance the economy will take a knock.
For starters, oil prices have already skyrocketed on supply concerns, seeing that this crisis is taking place in the oil-rich Middle East, where most wars tend to take place.
As a result, gas prices will eventually tick higher, meaning businesses will spend more to conduct business, and consumers will pay more at the pump.
Over time, if oil/gas prices remain inflated, consumer spending will also take a hit and the economic recovery won’t be as much of a slam-dunk.
War Means Seeking Shelter
- When a war breaks out or threatens to break out
- Most people seek shelter both literally and figuratively
- For investors that means ditching risky stocks and jumping into bonds
- Which are a safe haven during uncertain times
When a war breaks out, or even fears of a war, investors tend to seek shelter for their assets (too), a safe place to earn a return and avoid a collapse.
The obvious place is always bonds, and the number one place to flee from is the stock market. So that’s probably why we saw stocks take a big dive yesterday.
Investors take the “flight-to-quality,” exchanging high-risk stocks for relatively low-risk, safe haven assets like gold and Treasury bonds.
This phenomenon explains why the 10-Year Treasury yield fell from nearly 3% late last week to as low as 2.7% yesterday, before gaining a little back today.
Long story short, bond yields and mortgage rates tend to mirror each other in terms of direction, so if yields fall, rates fall, and vice versa.
That is what we’ve seen over the past week or so. Interest rates on the 30-year fixed were nearing 5%, perhaps hovering around 4.875%, and are now as low as 4.5% again.
This is great news for prospective home buyers (and those that decided to float), but it’s bad news for the victims of war and the rest of the world.
It’s also bad news for consumers at large – if rates are heading back down it means things aren’t going as planned for the economy.
War Gives the Fed Pause
- If and when there is a war or rumblings of one
- The Fed will probably become more dovish and hold off on any rate increases
- And if investors are swapping stocks for bonds
- There’s a good chance mortgage rates will drop too
Before the war in Syria was a trending topic, the Fed grabbed the lion’s share of the headlines with its tapering talk.
Financial pundits argued about whether the Fed would taper next month or next year, and mortgage rates seemed to take a beating, regardless of the supposed outcome.
But now that there’s actually some uncertainty in the air, and something real to fear again, the Fed may have reason to “keep calm and carry on.”
After all, if this looming attack does increase the price of oil, or put us at odds with other countries in the region (or Russia), those economic consequences may become very real.
And seeing that the Fed has to make moves based on the direction of the economy, it may need to delay any sort of tapering, which would mean continued buying of mortgage-backed securities and Treasuries.
With both the Fed and other investors back in love with bonds, mortgage rates should fall, or at least cease their rapid ascent, which is good news for at least one group of individuals out there.