A new development of housing built along a canal near the Mokelumne river is seen on May 22, 2023, near Stockton, California.
George Rose | Getty images
Mortgage rates are increasing strongly this week, as investors sell the US Treasury bonds at a rapid pace. Mortgage rates vaguely follow the yield on the treasure at 10 years. Some speculate on foreign countries could pour out US Treasury bills in retaliation against President Donald Trump’s pricing plan.
But there is another concern, even greater, both for mortgage investors and for the very important spring housing market. And if China, one of the greatest holders of titles backed by mortgage claims (MBS), also decides to sell these assets in response to American trade policies. What if other countries follow?
“If China wanted to hit us hard, they could unload the treasury bills. Is it a threat? Of course,” said Guy Cecala, Executive President of Inside Mortgage Finance. “They will try to push the levers and try to put pressure … Targeting the housing rates and mortgage rates is a powerful engine of something like that.”
At the end of January, foreign countries held 1.32 Billion of American MBS dollars, or 15% of the total pending total, according to Ginnie Mae. The main owners: Japan, China, Taiwan and Canada.
China had already started to sell American MBS last year, with the country’s assets at the end of September 8.7% from one year on the other and down 20% at the beginning of December. Japan, which had shown gains in its MBS in September, showed a drop in early December.
If China and Japan accelerate these more sales, and if other nations followed, mortgage rates would increase even more than they are currently.
“The concern, I think, concerns the radar screens of people and being raised as a potential source of friction,” said Eric Hagen, mortgage financing analyst and specialized at BTIG. “Most investors fear that mortgages are widening in response to China, Japan or Canada with a reprisals.”
The widening of differences means higher mortgage rates. The spring housing market is already wading through the high prices of houses and weakening consumer confidence. Given the recent stock market road, potential buyers are increasingly worried about their savings and work. A recent Redfin survey revealed that 1 out of 5 potential buyers sells actions to finance their deposits.
Hagen said that the sale of MBS by foreign entities could further frighten the mortgage market.
“The lack of visibility for how much they could sell and their appetite for the sale, I think it would scare investors,” he said.
To add to pain, the American federal reserve, which is a major owner of MBS, currently leaves that the MBS exceed on its own portfolio, as part of an effort to reduce its assessment. In other moments of financial crisis, such as during the pandemic, the Fed bought MBS to maintain low rates.
“It is a source of potential pressure above all this conversation,” added Hagen.
