Current State of Mortgage Rates

This week has seen a notable increase in mortgage rates, primarily driven by a rapid sell-off of U.S. Treasury bonds. Mortgage rates are closely aligned with the yield on the 10-year Treasury bond, prompting concerns in the housing market.

International Dynamics Influencing Rates

There is growing speculation regarding the potential for foreign governments, particularly China, to offload their holdings of U.S. agency mortgage-backed securities (MBS). China’s move to sell off these assets could be seen as a retaliation to U.S. trade policies, particularly the tariff plans initiated during the Trump administration.

Guy Cecala, executive chair of Inside Mortgage Finance, commented, “If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is.” This highlights the strategic leverage that these nations may consider using to exert pressure on the U.S. economy, particularly targeting the housing sector.

The Role of Foreign Holdings in MBS

As of the end of January, foreign nations owned approximately $1.32 trillion in U.S. MBS, representing about 15% of the total outstanding. Major holders include Japan, China, Taiwan, and Canada. Recent trends show that China’s investments in these securities have already decreased, with holdings down by nearly 20% by December compared to the previous year.

Potential Outcome of Increased Sales

If China and Japan escalate their sales of U.S. MBS, along with potential actions from other countries, mortgage rates could see a significant spike. Eric Hagen, a mortgage and specialty finance analyst at BTIG, stated, “The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction.” Such actions could widen mortgage spreads, ultimately leading to higher borrowing costs for consumers.

Impact on the Housing Market

The current housing market is already challenged by elevated home prices and declining consumer confidence. A recent survey indicated that one in five potential homebuyers have considered selling stocks to fund down payments, revealing the stress on prospective buyers. The increasing rates, coupled with a volatile stock market, have heightened concerns about personal financial stability.

Hagen emphasized the psychological effect of MBS sales on investors, suggesting that a lack of clarity regarding foreign appetite for selling could further unsettle the market. Additionally, the U.S. Federal Reserve, a major MBS holder, is letting securities roll off its balance sheet, further complicating the landscape.