Key points
- Mortgage rates in the US are rising sharply
- US typically does not see high interest rates on its debt
- However, rates spiked sharply to touch 4.5pc on Wednesday
ISLAMABAD: Amid the intensifying trade war between the United States and China, mortgage rates in the US are rising sharply.
Confidence in the US economy is plummeting as investors dumped government debt amid growing concerns over the impact of Donald Trump’s tariffs.
Governments sell bonds, essentially an IOU, to raise money from financial markets for public spending, and in return, they pay interest, according to the BBC.
The US typically does not see high interest rates on its debt, as its bonds are viewed as a safe investment. However, on Wednesday, rates spiked sharply to touch 4.5 per cent.
Speculations
The selling is giving rise to speculations that some foreign countries could dump US Treasury bonds in retaliation against President Donald Trump’s sweeping tariff plan.
Apart from these fears, some are pointing towards a much bigger risk: What if China, one of the largest holders of agency mortgage-backed securities, decides to sell those holdings as well in response to the US trade policies?
At the end of January, foreign countries owned $1.32 trillion worth of US mortgage-backed securities, or 15 per cent of the total outstanding, according CNBC.
The risk
“If China wanted to hit us hard, they could unload Treasuries. Is that a threat? Sure it is,” according to Guy Cecala, executive chair of Inside Mortgage Finance.
Japan, China, Taiwan and Canada are the top owners of the bonds.
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
“They’re going to look at pushing levers and trying to put pressure. … Targeting housing and mortgage rates is a powerful driver of something like that.”
China had already begun selling off some US mortgage-backed securities last year, with the country’s holdings at the end of September down 8.7 per cent year over year and down 20 per cent by the start of December, CNBC reported.
Japan, which had shown gains in its mortgage-backed securities in September, showed a drop at the start of December.
If China and Japan were to accelerate those sales further, and if other nations were to follow, mortgage rates would rise even more than they are now.
