Monday, February 28, 2011

Don't get used to this!

Geopolitical events overshadowed this week's economic data and Treasury auctions. Unrest in the Middle East caused investors to seek relatively safer investments such as bonds. As a result, mortgage rates ended the week lower.

The violence in the Middle East reached a much greater level this week, as Libyan leader Gadhafi fought to retain control. Uncertainty about whether the violence will spread to other nations produced a "flight to safety", which means that investors shifted funds from risky assets such as stocks to relatively safer assets such as bonds. Higher demand for bonds, including mortgage-backed securities (MBS) helped mortgage rates improve.

As a result of the unrest in the Middle East, oil prices climbed to the highest levels since October 2008. When the current crisis eases, oil prices may move lower, but many investors expect that a higher risk premium will remain in the price of oil for quite a while. Higher oil prices impact mortgage rates in two opposing ways, increasing inflation (negative) and slowing economic growth (positive). In the longer term, it's not clear which influence will have a greater impact. Shorter term, there is a risk that the flight to safety trade will reverse as tensions ease, which could push mortgage rates back to higher levels.


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