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2011-03-21 09:43:50
How Japan Earthquake and Libya situation effect ho

With both the news in Japan and the Middle East impacting our markets, here’s what happened, and what the impact is on home loan rates.

The first thing to understand is the concept of 'safe haven trading.' At times of global unrest and uncertainty, like with last week’s nuclear crisis in Japan and the ongoing fighting in Libya, Traders will park their money in 'safe' investments like our Bonds. And since Bonds such as Mortgage Backed Securities (MBS) are tied to home loan rates, when Bond pricing improves, our home loan rates can improve... which is what we saw last week.

A 'safe haven trade' is just that... a trade, which is short-term. Should events around the world become more stable, this safe haven trade can unwind very quickly... with Bond prices and home loan rates worsening as a result. This is similar to how the market reacted at the end of last week, when Libya declared a cease fire to fighting after the United Nations declared a no-fly zone.

First, if Japan sells some of their Treasury holdings to help finance the recovery and reconstruction, like they did in 1995 after the Kobe earthquake, this could spur a sell-off in Bonds overall, which would cause Bonds and home loan rates to worsen.

Second, we cannot overlook the impact of inflation... which is the arch enemy of Bonds and home loan rates... both here and overseas. Not only is China struggling with inflation even though they have raised rates and tightened lending requirements multiple times over the past few months, but last week both our Producer Price Index (which measures inflation at the wholesale level) and our Consumer Price Index were hotter than expected.

The bottom line: If inflation is allowed to grow, it can be very difficult to rein in and control... and this will hinder improvement in home loan rates. And, if the situations in Japan and the Middle East stabilize or improve, we could see further unwinding of the 'safe-haven' buying of US Bonds... which will also hinder improvement in home loan rates.

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