Bad news can be good news for the bond markets and ultimately for mortgage interest rates.
When investors are uncertain about national and world events, money is taken out of the equity markets and goes into safer instruments like United States-backed Treasury Bills. Investors are now driven by events centering on the epic earthquake and resulting events in Japan. Investors as a rule do not like uncertainty. The devastation the earthquake has caused, coupled with the unraveling of the nuclear reactors, is sending uncertainty off the charts.
The week after the disastrous earthquake and tsunami and the resulting tragedy in Japan, the yield on the 10-Year Treasury Bills hit lows not seen since December of 2010. 10-Year Treasury notes reached a recent high water mark at 3.725% on February 8th, 2011. On March 2, 2011 the rate fell to 3.212%. This represents a spread of fifty basis points in a very short period of time.
Another driving force in bonds continues to be oil prices. Oil prices have found their way north or $100 a barrel. The events in Japan have tapered the surge in oil prices. The theory here is that with Japan’s economy being driven off the tracks due to the earthquake, their use of oil is greatly diminished for now. The concern over oil is that oil is inflationary.
What is not being talked about is Japan’s great dependence on nuclear power and how that relates to oil. It is possible that Japan will be more dependent on oil when their economy starts to build again. Granted it will take a lot of time for Japan to get back on its feet, but when they do the Japanese government will have to find a replacement for the Fukushima nuclear power plant that is now permanently offline and is still posing the threat at this time of a meltdown. Who knows what deficiencies will be found at the numerous other nuclear power plants.
In an article published by “Knowledge at Wharton” they talk about the impact of Japan and oil. The “fallout of the earthquake and tsunami in Japan has added to oil market confusion,” it says.
It is also noted that there are upside pressures on oil at the same time. The unrest in the Middle East, most recently in Bahrain, Libya and Egypt, causes speculators to drive up oil prices. Every $10 dollar rise in a barrel of oil results in a 25-cent increase in gas prices according to the folks at Wharton. Wharton professor Jeremy Siegel states, “Based on the amount of oil the US imports, every $10 increase in the price of oil equates to about a quarter of 1% of the country’s gross domestic product (GDP).”
Although rising gas prices do fuel rate increases, they will temper the growth of the economy, which may temper the future rise in interest rates.
The bottom line is that there is a lot of uncertainty in the world and in the financial markets. Expect a lot of volatility in interest rates for the near term.