Mortgage rates are rising sharply this week, as investors sell U.S. Treasury bonds at a swift pace. Mortgage rates follow loosely the yield on the 10-year Treasury. Some speculate foreign countries could be dumping U.S. Treasurys in retaliation against President Donald Trump’s sweeping tariff plan.
But there is another, even bigger, concern for both mortgage investors and for the all-important spring housing market. What if China, one of the largest holders of agency mortgage-backed securities, or MBS, decides to sell those holdings as well in response to the U.S. trade policies. And what if other countries follow?
“If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is,” said Guy Cecala, executive chair of Inside Mortgage Finance. “They’re going to look at pushing levers and trying to put pressure. … Targeting housing and mortgage rates is a powerful driver of something like that.”
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At the end of January, foreign countries owned $1.32 trillion worth of U.S. MBS, or 15% of the total outstanding, according to Ginnie Mae. The top owners: Japan, China, Taiwan and Canada.
China had already begun selling off some U.S. MBS last year, with the country’s holdings at the end of September down 8.7% year over year and down 20% by the start of December. Japan, which had shown gains in its MBS in September, showed a drop at the start of December.
“The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction,” said Eric Hagen, mortgage and specialty finance analyst at BTIG. “Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective.”
Widening spreads mean higher mortgage rates. The spring housing market is already floundering amid high home prices and weakening consumer confidence.
Given the recent stock market rout, potential buyers are increasingly worried about their savings and their jobs. A recent survey from Redfin found that 1 in 5 potential buyers sell stock to finance their down payments.
Source: CNBC
