Does War Impact Mortgage Rates?

It's being reported that the United States killed Iranian military leader Qasem Soleimani in a drone strike yesterday. While pundits focus on the implications of what was done to US interest in the region and the 60,000 Americans who live in the Middle East, I am going to focus on what this means and could mean for those looking to purchase a home and for those looking to refinance a mortgage.

Immediate Impact:

The immediate impact from the rising tensions between the United States and Iran to the bond market is more noticeable than it is to consumer mortgage rates. To be more specific; the greatest impact to the bond market will be Treasuries and not Mortgage Backed Securities. And for consumer mortgage rates that's the market we care about the most (MBS). As of this morning the 10 year yield dropped to 1.81% however Fannie Mae coupon 3.5 was barely positive.

So the immediate impact to mortgage rates is virtually nothing however the impact to the Treasury market is somewhat signficant.

Delayed Impact:

This is an unknown and will depend on two things:

• Will the crisis escalate?
• How long will the crisis last?

If this quickly esclates to a point in which troops are actualy fighting then you will probably see Treasury yields move even lower. Most likely consumer mortgage rates and MBS market will follow but gains will probably be limited to non-existant. Why? Because this is a "flight to safety" move by investors not an active/desired long term investment in Mortgage Backed Securities. The gains in MBS will probably be short lived unless the crisis goes on for an extend period of time.

With any crisis the big question is how long it will last? Most crisis situations have a very short shelf life and investors in bonds understand this. Usually the crisis is somewhat resolved in a matter of days or a week to two weeks. However if this goes beyond that and investors believe this is a long term crisis than the impact to MBS and consumer mortgage rates will be more significant.

But be careful in thinking this will be good for mortgage rates if it goes long term This could just as easily be a bad thing and you must keep that in mind as we move forward.

One big concern is oil. If there is a long term crisis and oil takes a super spike higher that does not come done that would create the potential for a surge in inflation which is really bad for interest rates. And just to be clear; these events only impact mortgage rates and not the loan programs that lenders offer.

Data Is Still More Important:

The most important thing to Mortgage Backed Securities and consumer mortgage rates remains the economic data. Today we have the ISM Manufacturing report and next week we have several economic reports that could clarify what mortagage rates will do in the following weeks.

As for this morning's ISM report; the market was expecting a reading of 49.0 after last months reading of 48.1. The report came in well below expectations at 47.2. This is not a good report for the economy but it is a good report for mortgage rates moving forward.