Rising Mortgage Rates and Foreign Holdings of MBS Amid U.S. Trade Policies
A recent surge in mortgage rates has raised concerns among investors, coinciding with accelerated selling of U.S. Treasury bonds. This shift is notable as mortgage rates generally track the yield on the 10-year Treasury bond.
The Impact of Foreign Investments on Mortgage Rates
Among the key sources of apprehension is the potential response from foreign countries, particularly China. As one of the largest holders of agency mortgage-backed securities (MBS), any substantial sell-off by China could significantly influence the U.S. housing market and mortgage rates. Analysts are speculating whether this move may be a reaction to the trade policies under President Trump’s administration.
Foreign Ownership of Mortgage-Backed Securities
As of the end of January, foreign nations collectively owned $1.32 trillion worth of U.S. MBS, representing 15% of the total market. Notably, the largest holders include Japan, China, Taiwan, and Canada, with China reportedly reducing its MBS holdings by 8.7% year-over-year as of the previous year.
Potential Consequences of Increased Sales
If major holders like China and Japan decide to expedite the selling of their MBS, it could lead to an even sharper rise in mortgage rates. This concern has been emphasized by analysts such as Eric Hagen of BTIG, who highlighted that fears surrounding the potential for retaliatory sales from these countries remains prevalent among investors.
Implications for the Housing Market
The ongoing rise in mortgage rates is compounded by existing challenges in the housing market, where high home prices and dwindling consumer confidence are already affecting buyer activity. Current trends indicate that buyers are increasingly reliant on liquidating stock to fund down payments, as noted in a Redfin survey indicating that 20% of potential buyers are taking this approach.
Federal Reserve’s Role in the Market
Additionally, the U.S. Federal Reserve, a significant owner of MBS, is currently allowing its holdings to decrease, a tactic aimed at shrinking its balance sheet. This diversely impacts market stability, especially when historical crises saw the Fed actively purchasing MBS to maintain lower rates.
Conclusion
The interplay between foreign investment decisions and domestic mortgage rates presents a complex landscape for the U.S. housing market. Should countries like China and Japan ramp up their MBS selling, the resulting increase in mortgage rates could further hinder housing market recovery during an already challenging spring season.
