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U.S. Treasury bonds, traditionally seen as one of the world’s safest financial assets, are suffering a sharp sell-off as President Donald Trump’s tariff war with China sparks panic across financial markets. Mortgage rates are climbing in response to this sell-off, according to CNBC.
Throw in the accelerated asset liquidation in China and things could get much worse.
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Mortgage rates tend to track the 10-year Treasury yield, so it doesn’t bode well for mortgages if investors decide to sell U.S. Treasury bonds. However, on May 7 the Federal Reserve held overnight interest rates steady at between 4.25% and 4.50% in a “wait and see” approach.
Adding to the risk is the possibility that U.S. mortgage-backed securities (MBS), 15% of which are held by foreign countries, could also be increasingly on the selling block.
Guy Cecala, executive chair of Inside Mortgage Finance, noted that if China wanted to strike a hard blow, they could offload Treasuries, calling it a potential threat.
At the time, President Trump had imposed up to 145% tariffs on Chinese goods. China retaliated with 125% tariffs on U.S. imports. Despite market volatility, Chinese central bank deputy governor Zou Lan recently stated there were no plans to drastically change their foreign reserves, emphasizing that fluctuations in individual assets would have limited impact.
“One single asset’s change in a single market will have a limited impact on the reserves,” he said.
China’s foreign exchange reserves were $3.205 trillion at the end of April, compared to $3.184 trillion in March.
But the question remains: If countries like China decide to dump U.S. Treasuries and MBS in retaliation for tariffs and trade policies, how could that impact you?
Treasury securities are bonds issued and backed by the U.S. federal government, while mortgage-backed securities (MBS) contain pools of mortgages.
Foreign countries hold $1.32 trillion in U.S. mortgage-backed securities (MBS), with China, Japan, Taiwan, and Canada being major holders. A MBS sell-off could disrupt global financial markets.
However, some doubt this will happen.
Melissa Cohn of William Raveis Mortgage points out that such a move would hurt China’s financial interests by devaluing its holdings and destabilizing global currency markets. China typically benefits from keeping its currency, the renminbi (RMB), lower than the U.S. dollar to maintain export competitiveness.
Still, an escalating trade war has raised uncertainty — and a sell-off isn’t off the table if China is willing to absorb losses. China had already begun selling off some of its U.S. MBS last year. There’s speculation it’s continuing to do so.
If you’re looking for a safe-haven investment to shield your savings amid a potential sell-off, gold could help diversify your assets.
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This can be a secure and stable investment option, enhancing diversification and safeguarding your cash value against economic uncertainties.
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For U.S. homebuyers, the sell-off of mortgage-backed securities (MBS) could lead to higher mortgage rates — especially for those with variable-rate mortgages.
“Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective,” Eric Hagen, mortgage and specialty finance analyst at BTIG, told CNBC
As rates rise, refinancing may become less attractive and some buyers could be priced out of the market. Higher rates could also decrease demand, causing housing prices to drop, while sellers may hold off until conditions improve. Additionally, lenders might tighten standards, increasing credit score requirements or down payments.
If you’re planning to buy, securing a mortgage pre-approval and locking in a good rate now could be wise. First-time buyers might consider a Federal Housing Association loan, while sellers may need to adjust by lowering prices or offering incentives. Amid economic uncertainty, both buyers and sellers might also choose to wait it out.
In uncertain times, securing the lowest mortgage rate is more important than ever — whether you’re refinancing or applying for a new mortgage. Even a slight variation in rates can translate into substantial long-term savings.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
