How Does War Affect Interest Rates?

How Does War Affect Interest Rates?

With conflicts erupting worldwide, the impact on various aspects of the economy, including interest rates, has become a subject of curiosity for many. Recent events, such as the Israeli conflict and the ongoing Ukrainian crisis, have reignited discussions about how wars influence mortgage interest rates. In this article, we’ll delve into this complex relationship and explore the short-term and long-term consequences of global conflicts on interest rates.

The Short-Term Effect

When a conflict breaks out, one of the immediate reactions in the United States is a drop in mortgage interest rates. Why does this happen? The answer lies in the concept of a “flight to safety.” During times of uncertainty and upheaval, people seek refuge for their finances in safe and stable assets. Historically, the United States and its currency, the US dollar, have been seen as a haven for investors during turbulent times.

Investors from around the world tend to shift their money into the US, investing in instruments like US Treasury bills and notes, which are considered highly secure. This increased demand for US Treasuries allows the US government to offer lower yields, reducing interest rates on these securities. The 10-year Treasury yield, in particular, has a strong correlation with mortgage interest rates. When Treasury yields drop, mortgage rates typically follow.

The Long-Term Implications

However, it’s important to note that this drop in interest rates is a short-term effect. Wars create uncertainty, which tends to cause volatility in the financial markets. While initial reactions may lead to lower mortgage rates, the long-term consequences are less predictable. Conflict introduces a level of instability that can make it challenging to forecast where mortgage rates will ultimately settle.

The Long View

In the grand scheme of things, a conflict’s impact on interest rates is a small part of a much larger picture. While some may cheer for lower interest rates in the short term, it’s crucial to consider the long-term sustainability of the global economy. Conflict is detrimental on multiple fronts. It leads to loss of life, disrupts societies, and destabilizes regions. As a company working for those who serve in the military, we can attest to the fact that war and conflict are far from desirable outcomes.

In addition to the human toll, a conflict-ridden world is not conducive to economic growth and stability. So, while lower mortgage rates might seem appealing in the short term, they should not come at the expense of peace and global security. We should always prioritize long-term prosperity and international harmony.

I hope this has shed light on the complex relationship between conflicts and interest rates. If you have any more questions or need further information, feel free to reach out to us. Take care.