Weekly Economic Summary – March 3, 2011

The unrest in the Middle East drove up oil prices and pushed
investors into the safety of bonds which improved home loan rates. To see how
those elements impacted home loan rates, let’s take a deeper look at
each. 

First, the global unrest in the Middle East continues to impact the markets.
The protests that started a few weeks ago in Tunisia and Egypt have now spread
to Bahrain, Yemen and Libya. Libya is of particular concern to the markets since it is the
largest holder of oil reserves in Africa.

With the thought of oil fields at risk and with no foreseeable resolution,
oil spiked as much as $12 a barrel higher last week – climbing over the mark of
$100 per barrel. The recent spike in oil has only just begun to translate to
pumps across the country, so you can expect to see higher prices in the coming
weeks.

 In addition to higher oil prices, traders are concerned about what might
happen. And when traders are uncertain, they tend to move money into the
relative safety of bonds, which offer lower returns but also lower risks. This
flood of money into bonds – including mortgage bonds – helps prices and home
loan rates improve. And sure enough, last week mortgage bonds traded higher, as
protests permeated throughout the Middle East.

Those gains in bonds have been limited by the concern of inflation down the
road. That’s because investors demand a higher yield now to offset the
possibility that future inflation will eat into their returns. That was
evidenced by the tepid buying demand in last week's Treasury auctions. 
 
The bottom line is that the global situation has been a driving force behind
improvement in the bond market and that it may continue to do so in the coming
weeks. Provided by Bank of America.


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