As I’ve been saying for a while, all the potential bad news (for mortgage rates) has pretty much been reported over the past couple of months. And then some!
On the other hand, anything that might be positive for mortgage rates, such as easing inflation and higher unemployment rates, has been largely ignored. Prices don’t seem to have stopped.
Simply put, we have seen a very defensive bond market lately, which in turn has driven up consumer mortgage rates.
No one was willing to make a major effort in light of the sweeping economic changes proposed by the incoming administration.
But as you might expect, many of the much-talked-about policies like tariffs and trade wars may never materialize in reality, which would help mortgage rates get back on their downward path.
Treasurer Besent is seen as a less bloated option
Without getting complicated here, the appointment of Treasury Secretary Scott Besent has eased inflation concerns.
He is seen as a less volatile and more conservative option to implement some of Trump’s ideas without ruffling too many feathers.
This includes cutting government spending and using the threat of tariffs to improve trade relations. All of this points to easing inflation rather than rising prices.
Low inflation is good for bonds, and therefore good for mortgage rates since they track the yields of longer-maturity bonds such as the 10-year bond.
Prior to this announcement, there were a lot of concerns surrounding Trump’s policies, which include tax cuts and a trade war with China and other countries.
Specifically, its tariffs are viewed as inflationary because the costs are usually passed on to consumers.
Given that inflation has been the main concern in the economy over the past few years, the idea of reigniting it has led to a significant increase in the yield on 10-year bonds.
It has increased nearly 90 basis points in a period of less than two months, taking the 30-year fixed yield from around 6% to above 7%.
Before Trump’s win, it looked as if the 30-year period was headed toward the 5% range again.
Many have been saying that mortgage rates in the mid-five years, or perhaps even higher, would normalize the housing market and bring buyers back.
In hindsight, this move down was short-lived, but it may get a second chance through a more balanced financial approach led by Besant.
3-3-3 plan, but maybe not 3% mortgage rates
One of Besant’s main talking points is “3-3-3 plan“.
It includes reducing the budget deficit to 3% of GDP by 2028, with the aim of achieving 3% economic growth through reducing regulation, and increasing domestic oil production by 3 million barrels per day.
This simplistic plan likely appealed to Trump, even though Besant has had Democratic ties in the past.
But the three-pronged approach seems to be positive for bonds because it is anti-inflationary.
Lower government spending and a more conservative approach to the impending trade war and tariffs could ease inflation concerns.
Higher oil production can also lead to lower prices for consumers since production costs are typically passed on to the end user.
While this all sounds very good, it’s important to note that it’s also all just guesswork.
So a return to 3% mortgage rates may be point 3 that does not quite materialize under this plan.
However, another of Besant’s ideas was to convince foreign countries to buy long-term US government debt.
This is considered “Payment in advance“To reach the huge defense umbrella of the United States.
Renewed demand for Treasuries could push down 10-year bond yields, which correlate well with 30-year fixed mortgage rates.
In short, his proposals could reverse the recent rise in bond yields and return them to their downward trajectory.
If you recall, the 10-year yield was close to 3.50% in mid-September before the election took center stage.
Assuming an increase closer to 100 basis points turns out to be unjustified, yields could return to those levels.
They could actually retreat even further if the course is reversed.
Sprinkle some pressure on the spreads between mortgage rates and bond yields, and you’ll actually be in the high 4s for a 30-year fixed.
Just remember that with this nomination, we will now be speculating in a different direction, and in the end what really matters (as always) is the economic data.
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