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Mortgage rates are rising, influenced by a recent sell-off of U.S. Treasury bonds, as reported by CNBC.
Additionally, a similar trend in mortgage sales out of China could exacerbate the situation. Mortgage rates usually align with the 10-year Treasury yield, making it unfavorable for the mortgage market if investors decide to divest from U.S. Treasury bonds.
Compounding the issue is the possibility that U.S. mortgage-backed securities (MBS), of which foreign nations hold about 15%, could also see increased selling pressure.
Guy Cecala, executive chair of Inside Mortgage Finance, pointed out to CNBC, “If China wanted to strike us hard, they could offload Treasuries. Is that a threat? Absolutely.”
At the moment, President Donald Trump has introduced tariffs as high as 145% on goods from China, which prompted Beijing to retaliate with tariffs of 125% on American imports.
If nations like China begin to offload U.S. Treasuries and MBS in response to these tariffs and trade strategies, it raises the question: what could be the implications for individuals back home?
Treasury securities are bonds issued and fully backed by the U.S. government, while mortgage-backed securities are comprised of pooled mortgage loans.
According to a global market analysis by Ginnie Mae, foreign entities hold approximately $1.32 trillion in U.S. mortgage-backed securities. China ranks among the top holders, along with Japan, Taiwan, and Canada.
Should Chinese financial institutions start a sell-off of MBS, it could trigger significant ripples across global financial markets.
There is skepticism about the likelihood of such a situation unfolding. Melissa Cohn, regional vice-president at William Raveis Mortgage, noted, “Doing so would harm China’s own financial interests by devaluing its remaining assets and destabilizing global currency markets.”
China typically strives to maintain a lower renminbi (RMB) compared to the U.S. dollar, as a nation reliant on exports. This strategy helps keep Chinese products competitively priced in international markets. By investing in U.S. debt, China supports the consumption capacity of American consumers for Chinese goods.
Nonetheless, the intensifying trade war amplifies uncertainty; a sell-off remains a possibility if China decides to bear the potential losses. Reports indicate that China has already begun selling off some of its U.S. MBS last year, with speculation that this trend is ongoing.
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The behavior of MBS investors directly influences mortgage rates, based on their pricing for mortgage-backed securities. A surge in sell-offs would likely lower bond prices and subsequently elevate mortgage rates for American consumers—particularly those with variable-rate mortgages.
“Most investors are worried that mortgage spreads could widen if either China, Japan, or Canada were to retaliate,” stated Eric Hagen, a mortgage and specialty finance analyst at BTIG, as he spoke to CNBC.
For affected homeowners, even refinancing could result in higher payments. Rising rates might discourage refinancing, as potential savings could be outweighed by increased costs. As of April 17, the average 30-year fixed mortgage rate stood at 6.83%, according to Freddie Mac.
Some prospective buyers may find themselves priced out of the market due to higher mortgage rates, leading to diminished demand and potentially lower housing prices. As a result, sellers may choose to remain in their homes until market conditions improve.
Higher rates not only lead to increased monthly payments but also elevate borrowers’ debt-to-income ratios, potentially resulting in stricter lending standards. Lenders might respond by raising credit score requirements or insisting on larger down payments.
For potential homebuyers, obtaining a mortgage pre-approval can clarify your budget, although it does not guarantee financing. Locking in a favorable rate could be wise if obtainable now. First-time buyers might consider applying for an FHA loan, which is backed by the Federal Housing Administration.
If market demand falters, sellers might contemplate reducing their asking prices or offering incentives, like covering buyer closing costs, to attract interest.
Conversely, in light of economic uncertainty and declining consumer confidence, both buyers and sellers could opt to delay transactions.
For now, focusing on building an emergency fund may be prudent to help manage any foreseeable increases in expenses.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source
finance.yahoo.com