How a “flight-to-quality” trade helps mortgage rates
A “flight-to-quality” trade is not the latest comedic duo out of New Zealand but it is an important concept when it comes to tracking mortgage rates. I will do my best in this post to explain what it is and how it impacts long-term mortgage rates.
“Flight-to-quality” is sometimes also referred to as “flight-to-safety” which is probably a better reference point for understanding the concept.
A “flight-to-safety” trade occurs when investors collectively shift investment capital away from traditionally “riskier” assets such as stocks and reinvest that capital into traditionally “safer” asset classes such as cash, cash equivalents, and fixed-income securities. Mortgage-backed Bonds (MBS’s) are generally considered a “safer” investment and therefore are included in the latter.
When a “flight-to-safety” trade occurs selling pressure is placed on the stock market which sends the value of stocks lower. In contrast, demand for “safer” investments increases which drives the value of these assets higher, pushing yields lower.
The result then of a “flight-to-safety” trade is ultimately favorable to mortgage rates.
Let’s quickly take a look at a real life example to show how this might work. This morning we awoke to news that two major credit ratings agencies (Moody’s & Fitch) had each downgraded the credit rating on Greece & Dubai.
Their announcements spread concern amongst the investment community that debt and other assets issued from these less stable economies were risky. As a result, we witnessed a “flight-to-safety” trade which sent the stock market lower and US dollar higher. This trade is evident in the chart below where the purple line represents the Dow Jones Industrial Average and the green line represents the US Dollar index.
Flight-to-safety trade on Dec. 8, 2009
Mortgage rates benefited from this dynamic falling .125% from the previous day.
So, in summary, during a flight-to-quality in the financial markets mortgage rates tend to fall as investors seek out a “safe” place to park their capital until anxiety in the market dissipates. Beware of the fact that the market always recovers and when it does the flight-to-safety trade unwinds and usually pushes rates back to the levels they were before the trade.
Posted: December 8th, 2009 under Economics & Interest Rates.
Tags: how flight-to-quality impacts mortgage rates, how flight-to-saftey impacts mortgage rates, market anxiety and mortgage rates, what is flight-to-quality, what is flight-to-saftey?
Comments
Pingback from My Mind on Mortgages » Rate Update January 20, 2010
Time January 20, 2010 at 7:25 am
[...] markets are experiencing a “flight-to-quality” this morning in response to weak economic data and bearish news out of [...]
Pingback from My Mind on Mortgages » Rate Update February 10, 2010
Time February 10, 2010 at 7:14 am
[...] talks produce a credible plan then we may see mortgage rates move slightly higher as the “flight-to-quality” trade [...]
Pingback from My Mind on Mortgages » Rate Update February 11, 2010
Time February 11, 2010 at 9:46 am
[...] some skepticism in the markets. Should the EU announce a credible plan it would unwind the “flight-to-quality” trade and put upward pressure on mortgage [...]
Pingback from My Mind on Mortgages » Rate Update March 3, 2010
Time March 3, 2010 at 8:53 am
[...] this weekend to gain support for the plan. This news is likely to lead to an unwinding of the “flight-to-quality” trade which helped drive mortgage rates below [...]
Pingback from My Mind on Mortgages » Rate Update March 4, 2010
Time March 4, 2010 at 8:53 am
[...] client’s portfolios due to an uncertain economic outlook. This is a perfect example of a “flight-to-quality” trade where investors purchase relatively “safe” US Treasuries because other investments [...]
Pingback from My Mind on Mortgages » Rate Update March 8, 2010
Time March 8, 2010 at 8:37 am
[...] mess they find themselves in. His support is likely to take some more wind out of the “flight-to-quality” trade which has helped mortgage rates over the past couple [...]
Pingback from My Mind on Mortgages » Rate Update March 23, 2010
Time March 23, 2010 at 7:57 am
[...] Mortgage rates and other long-term interest rates continue to benefit from concern over the fiscal health of Greece and other EU countries. Greece has yet to unveil a credible plan to solve its problems and as a result US debt securities (including mortgage-backed bonds) are benefiting from a “flight-to-quality”. [...]
Pingback from My Mind on Mortgages » Rate Update Tax Day 2010
Time April 15, 2010 at 7:46 am
[...] news has also pushed rates in the US higher because it is causing some investors to unwind the “flight-to-safety” trade that has helped keep yields [...]
Pingback from My Mind on Mortgages » Rate Update April 16, 2010
Time April 19, 2010 at 7:42 am
[...] is helping to keep yields low here. At some point though Greece will get through this and this “flight-to-quality” trade will [...]
Pingback from My Mind on Mortgages » Rate Update April 20, 2010
Time April 20, 2010 at 7:42 am
[...] in the bond market fell yesterday afternoon as traders began to unwind the “flight-to-safety” trade which was prompted by a combination of the Goldman Sachs suit, Greece, and the volcanic [...]
Pingback from My Mind on Mortgages » Rate Update April 21, 2010
Time April 21, 2010 at 7:49 am
[...] ebb and flow of concern over Greece has turned negative once again. This has helped the “flight-to-quality” trade gain a little momentum today which is supporting mortgage-backed bond [...]
Pingback from My Mind on Mortgages » Rate Update April 22, 2010
Time April 22, 2010 at 7:53 am
[...] This is a bad sign for the ailing country but good news for mortgage rates as investors seek the “safety” of US denominated [...]
Pingback from My Mind on Mortgages » Rate Update April 23, 2010
Time April 23, 2010 at 7:53 am
[...] package from the European Union earlier today which has calmed investors’ nerves and is likely pressuring yields higher here in the [...]
Pingback from My Mind on Mortgages » Rate Update April 27, 2010
Time April 27, 2010 at 7:59 am
[...] rates are likely to benefit from the recent “flight-to-quality” trade that is the result of increasing concerns of European debt. We will float for now and [...]
Pingback from My Mind on Mortgages » Rate Update April 28, 2010
Time April 28, 2010 at 8:04 am
[...] Greece’s credit rating to “junk status”. This provided additional fuel for the “flight-to-quality” trade that has helped interest rates ease in the past few weeks. Flight-to-quality pushes rates [...]
Pingback from My Mind on Mortgages » Rate Update April 29, 2010
Time April 29, 2010 at 7:43 am
[...] attention. The fiscal problems in Greece have caused investors to scramble for traditionally “safe” US dollar denominated securities which has helped push mortgage rates [...]
Pingback from My Mind on Mortgages » Rate Update May 3rd, 2010
Time May 3, 2010 at 8:23 am
[...] the perceived risk for investing in Greek debt. As a result, we expect some unwinding of the “flight-to-quality” trade which helped pressure US mortgage rates lower over the previous couple [...]
Pingback from My Mind on Mortgages » Rate Update May 4, 2010
Time May 4, 2010 at 8:13 am
[...] We’ve referenced many times in the past couple weeks the impact that credit defaults overseas has on domestic interest rates. If you want to learn more about the “flight-to-quality” effect then please read THIS LINK. [...]
Pingback from My Mind on Mortgages » Rate Update May 5, 2010
Time May 5, 2010 at 8:05 am
[...] The protests call into question the long-term stability of the country which is supporting the “flight-to-quality” trade that we’ve referenced in ‘rate update’ each of the past couple [...]
Pingback from My Mind on Mortgages » Rate Update May 7, 2010
Time May 7, 2010 at 8:31 am
[...] trade in “risky” assets for traditionally “safer” ones. This is the definition of a “flight-to-quality” trade and currently interest rates are [...]
Pingback from My Mind on Mortgages » Rate Update May 10, 2010
Time May 10, 2010 at 8:16 am
[...] EU is able to deliver a credible debt relief plan we can expect rates to reverse higher as the “flight-to-quality” trade unwinds. We may be seeing the beginning of that this [...]
Pingback from My Mind on Mortgages » Rate Update May 11, 2010
Time May 11, 2010 at 7:48 am
[...] thought that all would be fine and I shifted my outlook to ‘locking’ thinking that the “flight-to-quality” trade would [...]
Pingback from My Mind on Mortgages » Rate Update May 20, 2010
Time May 20, 2010 at 7:56 am
[...] on the part of all EU countries to fix the debt crisis. This growing fear is further sparking the flight-to-quality trade which has helped drive yields lower in the [...]
Pingback from My Mind on Mortgages » Rate Update May 21, 2010
Time May 21, 2010 at 8:00 am
[...] drop in the stock market provided further fuel to the “flight-to-quality” trade that has led to lower interest rates here in the US. This morning the Dow Jones [...]
Pingback from My Mind on Mortgages » Rate Update June 1, 2010
Time June 1, 2010 at 8:21 am
[...] the EU continues to drive money into US-denominated assets, including mortgage-backed bonds. The additional demand is helping to keep mortgage rates [...]
Pingback from My Mind on Mortgages » Rate Update June 3, 2010
Time June 3, 2010 at 8:28 am
[...] was mostly encouraging. And with no new headlines out of Europe investors are unwinding their “flight-to-safety” positions which has helped keep rates low over the past few [...]
Pingback from My Mind on Mortgages » Rate Update June 8, 2010
Time June 8, 2010 at 8:07 am
[...] when they announced budget cuts. Growing fears over the fiscal health of Europe has created a “flight-to-safety” trade which has pushed mortgage rates back down below 5.00%. Their announcement should hurt [...]
Pingback from My Mind on Mortgages » Rate Update June 14, 2010
Time June 14, 2010 at 7:19 am
[...] Europe is helping the outlook for the Euro debt crisis. As a result there is pressure on the “flight-to-quality” trade here at home this [...]
Pingback from My Mind on Mortgages » Rate Update June 24, 2010
Time June 24, 2010 at 8:04 am
[...] positions into relatively “safe” fixed income securities. This is the definition of a “flight-to-quality” trade and that is why yields are so [...]
Pingback from My Mind on Mortgages » Rate Update June 28, 2010
Time June 28, 2010 at 8:16 am
[...] this news investors are further exhausting the “flight-to-quality” trade that has carried rates lower over the previous couple [...]
Pingback from My Mind on Mortgages » Rate Update June 29, 2010
Time June 29, 2010 at 7:53 am
[...] “flight-to-quality” trade which has been responsible for lower rates over the past few weeks got some more juice [...]
Pingback from My Mind on Mortgages » Rate Update June 30, 2010
Time June 30, 2010 at 7:33 am
[...] was thought to be the case. On the news stocks in Europe traded higher reducing demand for the “flight-to-quality” [...]
Pingback from My Mind on Mortgages » Rate Update July 23, 2010
Time July 23, 2010 at 8:28 am
[...] you’ll recall European sovereign debt worries have been the primary driver of the “flight-to-quality” trade which has pushed yields lower here in the US. If this report does reveal that the [...]
Pingback from My Mind on Mortgages » Rate Update July 27, 2010
Time July 27, 2010 at 8:10 am
[...] “flight-to-quality” trade is unwinding a bit in the financial markets today. Stronger than expected earnings [...]
Pingback from My Mind on Mortgages » Rate Update December 11, 2009
Time December 11, 2009 at 7:45 am
[...] How a “flight-to-quality” trade helps mortgage rates [...]