What exactly is a “flight to safety”?


What exactly is a “flight to safety”?

The current crisis in the Ukraine, which has been called the “worst crisis in Europe in the 21st century”, is having many far reaching effects, one of which is actually helping the US mortgage rate market. The unrest has actually caused a “flight to safety” which is adding support to US Treasuries and MBS (mortgage-backed securities). This begs the question, what exactly is a flight to safety?

A flight to safety, also called a flight to quality, unfolds when investors are more concerned about protecting themselves from risk than they are with making money. During times of turbulence, investors will often move to investments where they are the least likely to experience a loss – typically bonds, and specifically US Treasuries (which are guaranteed by the US government) and MBS (mortgage-backed securities). MBS have slightly more risk than Treasuries, but also have a better yield. At the simplest level, the flight to safety is an investor saying to themselves, “Do I feel comfortable taking a risk, or am I better off keeping my money safe right now?”. When enough investors are making that call, the result is a rally in Treasuries and MBS markets. That is what we are experiencing right now.

What is causing mortgage rates to improve and how long will it continue?

There is quite a bit of turmoil in European and Asian markets right now due to the Ukrainian situation and its implications. That doubt and fear is starting to bleed over to the US markets, and we’re seeing MBS maintain a rally that is propping up mortgage rates. However, as we talk about below, the MBS market is poised for a reversal and we’ll see rates increase when that happens. Likely the markets will react before the media does – so it is important not to get caught up reading headlines looking for signs that the reversal is coming. Instead, it is important to be monitoring the markets in real time to be able to act fastest when the time is right.

 


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