Mortgage rates are climbing quickly this week. Investors are rapidly selling U.S. Treasury bonds, causing this shift. As mortgage rates often track the yield on the 10-year Treasury, this situation raises concerns, especially as the spring housing market approaches.
One major worry is the potential action from China, a significant holder of mortgage-backed securities (MBS). If China decides to sell its MBS, it could have a big impact. Guy Cecala, the executive chair of Inside Mortgage Finance, warns that this could be a strategic move to exert pressure related to trade policies. He said, "If China wanted to hit us hard, they could unload Treasuries. Targeting housing and mortgage rates is a powerful driver of something like that."
Recent data shows foreign countries held about $1.32 trillion in U.S. MBS by the end of January, accounting for 15% of the total. The leading investors are Japan, China, Taiwan, and Canada. Last year, China started selling off some U.S. MBS, decreasing its holdings by about 8.7% by September. A more significant drop of 20% followed by December.
If both China and Japan increase their MBS sales, mortgage rates could spike even higher. Eric Hagen, a mortgage analyst at BTIG, mentioned that investors are worried about the consequences of these potential sales and their effects on mortgage spreads. Widening spreads can lead to higher mortgage rates, which could hinder the housing market even further.
The current housing market is struggling with high prices and decreasing consumer confidence. A recent Redfin survey indicates that one in five prospective buyers may need to sell stocks to afford down payments. This trend shows how anxious buyers are feeling, especially as the stock market fluctuates.
Adding to these concerns, the U.S. Federal Reserve is gradually letting MBS roll off its balance sheet, which can further affect rates. In the past, like during the pandemic, the Fed was buying MBS to keep rates low. The shift from a buyer to a seller creates an uncertain environment for mortgage investors.
To sum up, the potential for foreign investors, particularly China and Japan, to sell off their U.S. MBS holdings could create significant challenges for an already shaky housing market. The interplay of international trade relations, investor sentiment, and Federal Reserve policies will be crucial to monitor in the coming weeks.
For more on this topic, consider exploring insights from the Federal Reserve’s annual reports for an in-depth understanding of their MBS policies and market impacts.
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