War Fears Help the Bond Market

Stocks are finally taking a step back this morning in response to news that oil fields in Saudi Arabia were attacked over the weekend. This has cut output from Saudi Arabi by 50%, which is causing oil prices to surge. Although the source of the attacks are not certain, it is widely expected that this was tied to Iran, who could benefit from higher oil prices and more demand for Iranian oil. President Trump sparked fears of a war with Iran by stating that we are “Locked and loaded”, which is clearly a potential threat. Although higher oil prices in general are considered inflationary and not good for mortgage interest rates, the fear of potential retaliation from the U.S. is helping soften mortgage interest rates this morning.

This is a busy news week for mortgage interest rates, highlighted by the Federal Reserve’s announcement on interest rates coming this Wednesday. Although the economy has been showing continued signs of strength the past couple weeks, it is still widely expected that we will get another ¼% rate cut. We will be closely watching how the bond market responds to the news. If the market believes this will cause inflation to take a step higher, we will see mortgage interest rates move higher on the news. However, if the market is comfortable with the level of expected inflation, bonds may respond favorably. It’s too early to say which way this will go.

Although mortgage bonds are stabilizing, only float if you can closely watch the markets. There is too much volatility to take a passive approach.