Mortgage rates are climbing in response to a sell-off off in U.S. Treasury bonds, according to CNBC.
Throw in an accelerated mortgage sell-off in China and things could get much worse. 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.
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
“If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is,” Guy Cecala, executive chair of Inside Mortgage Finance, told CNBC.
At the time of writing, President Donald Trump had imposed tariffs of 145% on Chinese goods, while China retaliated with tariffs of 125% on imported American goods.
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 own $1.32 trillion of U.S. mortgage-backed securities, according to a global markets analysis from Ginnie Mae. China is one of the largest holders of agency mortgage-backed securities, along with Japan, Taiwan and Canada.
If Chinese institutions started selling off MBS — and if other countries start following suit — it could ripple through global financial markets.
Some doubt it will happen. This would “damage China’s own financial interests by devaluing its remaining holdings and destabilizing global currency markets,” Melissa Cohn, regional vice-president of William Raveis Mortgage, told Newsweek.
It’s generally thought to be in China’s best interest that the country keep its currency, the renminbi (RMB), lower than the U.S. dollar, since — as a nation dependent on exports — it wants to keep its prices competitive. Thus, by purchasing U.S. debt, China maintains the balance according to which Americans can continue to buy more Chinese products.
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 and there’s speculation it’s continuing to do so.
