As I’ve been saying for a while now, all the potential bad news (for mortgage rates) has been pretty much baked in the past few months. And then some!
Meanwhile, anything that might be positive about mortgage rates, such as reducing inflation and rising unemployment, has been ignored. The ratings never seem to catch a break.
Simply put, we’ve experienced a very defensive bond market recently, which is driving up consumer mortgage rates.
No one has wanted to close their neck because of the drastic economic changes proposed by the administration.
But as I suspected, much of the talk about policies like tariffs and trade wars may not materialize, which should help mortgage rates get back on their downward path.
Treasury Secretary Seen as Less Inflationary Option
Without much confusion here, the appointment of Treasury Secretary Scott Bessen has eased inflationary concerns.
He is considered a consistent, consistent person, who chooses to implement some of Trump’s ideas without ruffling too many feathers.
This includes reducing government spending and using the threat of spending to improve trade relations. Everything points to lower inflation instead of higher prices.
Inflation is good for bonds, so it is good for mortgage rates as it tracks bond yields for longer maturities like 10 years.
Before the announcement, there was a lot of fear about Trump’s policies, which include tariff cuts and a trade war with China and other countries.
In particular, his tax rates are seen as inflationary as the costs are often passed on to consumers.
And since inflation has been a major concern in the economy over the past few years, the idea of managing it has led to a sharp rise in the 10-year yield.
It’s up nearly 90 basis points in less than two months, sending the 30-year fixed-year yield from around 6% back to more than 7%.
Before Trump’s victory, it looked like 30 years was set for 5% again.
Many have been saying that mortgage rates in the mid-5s, or maybe even higher, would normalize the housing market and bring back buyers.
In retrospect, that decline was short-lived, but it could get a second chance in the form of a balanced financial system driven by Bessent.
3-3-3 Plan, But Maybe Not 3% Mortgage Rates
One of Bessent’s key talking points is his “3-3-3 system.”
It includes reducing the budget deficit to 3% of GDP by 2028, targeting economic growth of 3% through reduced regulation, and increasing domestic oil production by 3 million barrels per day.
This simple plan is likely to attract Trump, even though Bessent has previous Democratic ties.
But this three-pronged approach seems to favor bonds because they are anti-inflationary.
Low government spending and a conservative approach to the upcoming trade war and tariffs may ease inflation concerns.
Higher oil production can lead to lower prices for consumers as production costs are often passed on to the end user.
While this all sounds great, it’s important to note that it’s also all guesswork.
So the return on loan rates of 3% may be the “3” that doesn’t happen well under this plan.
However, one of Bessent’s ideas is to get foreign countries to buy long-term US government debt.
This is seen as “pre-paying” for access to the United States’ largest security umbrella.
The renewed demand for wealth could lower the yield on the 10-year bond, which correlates very well with 30-year mortgage rates.
In short, his proposals could reverse the recent rise in bond yields and put them back on their downward path.
If you recall, the 10-year yield was close to 3.50% in mid-September before the election took center stage.
Assuming a rise of nearly 100 basis points turns out not to be necessary, yields could return to those levels.
In fact they could fall even higher than that if the track was restored.
Sprinkle in the pressure on the spread between mortgage rates and bond yields and you’ll essentially be in the high-4s for the 30-year fixed term.
Just remember that with this appointment, we will now speculate on the other side, and in the end what will really matter (as usual) is the economic data.
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