By Victor Normand
Published: November 2011
I heard an economist speak recently about the sovereign debt crisis in Greece. She was not overly concerned, reminding everyone that in the overall scheme of things, the Greek economy was not very large and a default on its debt would be a contained event. In the end, a deal was struck within the Euro Zone which lowered the country’s debt burden by requiring holders of Greek debt to devalue their bonds by half. Again, in the larger scheme of things, not such a big deal.
But, as with most economic actions, reactions occur. In the case of the reduction in Greek debt, the “haircut” the bond holders were forced to take sent waves of apprehension toward all holders of European sovereign debt, especially the debt of Italy, Spain, Ireland, but, as it turns out, few European countries were unaffected.
Funds have begun to flow out of bond issues by European countries. The unanswered question is where will they flow to? That hasn’t been talked about much, but you can bet some of it is coming to the US. Despite all our economic, political, and social problems, at least in a relative sense, the US remains a safe place for large investments.
And if those investors do what they have often done in the recent past, US Treasuries will be the preferred buy. As more funds compete for US government bonds, particularly 10 year notes, rates will decline. As bond rates decline, so do mortgage interest rates.
In the long run, a healthy global economy is in everyone’s best interest, but as investors and institutions search for some degree of safe haven, those home buyers and those able to refinance existing mortgages will benefit from this temporary global anxiety.