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Rising Mortgage Rates: Concerns Amid Global Economic Shifts

A recent housing development located along a canal near the Mokelumne River, just outside Stockton, California, has drawn attention as mortgage rates surge sharply this week. The increase is largely attributed to a swift sell-off of U.S. Treasury bonds by investors, a trend that typically influences mortgage rates, which tend to align with the yield on the 10-year Treasury note.

Speculation is circulating regarding the motivations behind this bond sell-off, with some analysts suggesting that foreign nations might be liquidating U.S. Treasuries in reaction to President Donald Trump’s extensive tariff policies. However, a more significant worry for mortgage investors, especially as the crucial spring housing market approaches, is the potential for China—one of the largest holders of agency mortgage-backed securities (MBS)—to divest its holdings in retaliation to U.S. trade actions. The ripple effect of such moves by China and other countries could have dire consequences for mortgage rates.

“If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is,” remarked Guy Cecala, executive chair of Inside Mortgage Finance, underscoring the gravity of the situation. He emphasized that targeting the housing market and mortgage rates is a powerful lever in economic conflicts.

By the end of last year, foreign entities possessed approximately $1.32 trillion of U.S. MBS—accounting for around 15% of the total outstanding, as reported by Ginnie Mae. Notably, Japan, China, Taiwan, and Canada are the principal stakeholders, with Japan and China each holding about a quarter of a trillion dollars in assets.

China has already started the process of selling off U.S. MBS, with holdings dropping by 8.7% year-over-year as of September. An acceleration in these sales, particularly if mirrored by other nations, could lead to further increases in mortgage rates.

“The concern is on investors’ radar screens as a potential source of friction,” stated Eric Hagen, a mortgage and specialty finance analyst at BTIG. He highlighted fears that actions taken by China, Japan, or Canada with retaliatory intentions could lead to widening mortgage spreads, which in turn translate to higher rates.

Widening spreads exacerbate the challenges in an already troubled spring housing market, which is facing obstacles such as soaring home prices and diminishing consumer confidence. Compounding these issues, a recent survey by Redfin indicated that one in five prospective buyers is liquidating stock to fund their down payments, illustrating the financial strain many are experiencing amidst a turbulent stock market.

Furthermore, selling MBS by foreign parties could significantly unsettle the mortgage landscape, according to Hagen. “The lack of clarity regarding the extent and appetite for these sales would likely instill fear among investors,” he explained.

Adding to the complexity, the U.S. Federal Reserve, a major owner of MBS, is currently allowing its own portfolio to diminish as part of a strategy to reduce its balance sheet. In periods of economic turmoil, such as during the COVID-19 pandemic, the Fed had actively purchased MBS to maintain lower rates.

“This represents a source of potential pressure amid the broader conversation,” Hagen concluded, as stakeholders in the housing and investment sectors brace for potentially volatile market conditions ahead.

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