This week has witnessed a sharp increase in mortgage rates, attributed to a significant sell-off of U.S. Treasury bonds by investors. Typically, mortgage rates follow the trend of the 10-year Treasury yield. Some analysts suggest that this bond sell-off may be linked to foreign nations divesting from U.S. Treasuries as a reaction to President Donald Trump’s extensive tariff measures.
However, there is a broader concern looming over the mortgage investment landscape, particularly as the crucial spring housing market approaches. If China, a key holder of agency mortgage-backed securities (MBS), decides to offload these assets due to U.S. trade policies, it could set off a domino effect, prompting other countries to do the same.
“Should China choose to hit us hard, they could certainly sell off treasuries. This poses a serious threat,” remarked Guy Cecala, executive chair of Inside Mortgage Finance. “They may look to exert pressure… Housing and mortgage rates are potent targets for such actions.”
Data from Ginnie Mae reveals that as of January, foreign entities held $1.32 trillion in U.S. MBS, accounting for about 15% of the total. The major stakeholders include Japan, China, Taiwan, and Canada.
Last year, China started reducing its U.S. MBS holdings, with reported drops of 8.7% year-over-year by the end of September and a 20% decrease by early December. Conversely, while Japan had increased its MBS holdings in September, it also faced a decrease by the start of December.
If these two nations were to amplify their sell-offs, coupled with similar actions from other countries, mortgage rates could see even steeper increases.
“This concern is certainly on people’s minds and is being highlighted as a possible friction point,” commented Eric Hagen, a mortgage and specialty finance analyst at BTIG. “Investors are apprehensive that any retaliatory measures from China, Japan, or Canada could cause mortgage spreads to widen.”
Widening spreads typically translate to higher mortgage rates. The spring housing market is already struggling due to inflated home prices and declining consumer confidence. Following the recent stock market downturn, many potential buyers are increasingly anxious about their financial stability and employment prospects. A survey conducted by Redfin indicates that one in five prospective buyers is resorting to selling stocks to fund their down payments.
According to Hagen, a further sell-off of MBS by foreign players could further destabilize the mortgage market.
“The uncertainty surrounding the volume they could sell and their intent to do so could certainly spook investors,” he stated.
Compounding the situation, the U.S. Federal Reserve, which is a major holder of MBS, is currently allowing these securities to roll off its balance sheet as part of its efforts to reduce its overall financial holdings. In previous financial crises, such as during the pandemic, the Fed had actively purchased MBS to maintain lower rates.
“This represents an additional factor that could exert pressure on the entire mortgage landscape,” Hagen elaborated.
