Yesterday’s attacks on the World Trade Center and the Pentagon have created an environment of instability, closing U.S. financial markets and halting domestic air travel. Investors — seeking a safe haven amid the turmoil — boosted prices of European government bond markets and U.S. Treasuries, according to the interactive edition of the Wall Street Journal (WSJ.com). The strength of U.S. Treasuries abroad offers some indication that they will still be perceived as ‘safe haven’ when U.S. financial markets eventually reopen.
Among Treasury instruments, the 10-year is most closely associated with fixed mortgage rates. In the thirty days preceding Iraq’s invasion of Kuwait on August 2, 1990, the Federal Reserve reports that the 10-year Treasury yield was as high as 8.57%. Within about three weeks after the allied attack — which began on January 17, 1991 — the 10-year yield had fallen to 7.77 percent.
Housing finance giant Freddie Mac reported that the average 30-year fixed rate mortgage (FRM) — which was reported at 10.10% at the time of the invasion — fell to 9.37% by the time of the cease fire.
During the week prior to Timothy McVeigh’s bombing of the 9-story Murrah Federal Building in downtown Oklahoma City on August 19, 1995, the 10-year Treasury yield was as high as 6.59%; within thirty days the yield had fallen to 6.08%.
Recent economic turmoil in Argentina, a weak Japanese economy and a recently weakening U.S. economy have already helped push down Treasury yields. Doug Duncan, the Chief Economist at the Mortgage Bankers Association of America, told MortgageDaily.com that there will likely be an immediate flight to quality, bringing Treasury yields down even further.
However, the trade group’s economist noted that the mortgage backed securities (MBS) spread — the difference between the yield on the Treasuries and the yield required by investors of MBS — may widen, causing mortgage rates not to immediately drop as much as Treasury yields. He did indicate, however, that yesterday’s events were a hit to the economy that will pull both Treasury yields and mortgage rates down in the near term.
In a Media statement today, Freddie Mac economists said that financial markets are in turmoil at this point, and will be for some time. The government sponsored housing enterprise said it expects interest rates will drop as bond prices rise and stocks fall.
One factor putting upward pressure on long-term Treasuries yields is the Federal budget surplus. As pointed out in a Chicago Tribune story yesterday, recent upward pressure on longer-term Treasury yields reflects worries about the fading federal budget surplus.
