I knew I was going to write this post at some point in Trump’s second period.
And here we are, only 10 days inside. In the event that you haven’t heard, Trump administration has announced new tariffs that will come into force tomorrow.
The White House press secretary Karoline Leavitt said Trump will implement 25% duties on both Mexico and Canada along with 10% duties in China.
There were words that the White House was considering waiting until March 1 instead of giving time to possibly negotiating. But Leavitt said it was “false.”
Now it’s full steam front on duty from February 1st. And guess what? Bonds did not like it, which means that mortgage rates probably not either.
Call my bluff on customs rates
As noted, there was some confusion about when the tariffs would actually roll out, with some sayings March 1st.
It is an important detail because it is not only approx. 30 days, but rather an extra month to negotiate and even hold onto duty rates completely.
But on the one hand, it is a good thing if they are inevitable because there will be no more guessing, no longer waiting with bated breath.
There have been so much speculation about these tariffs since last year that it is somehow a relief to finally just get them over.
There is a good chance that Trump suddenly delivered them after being a little more Dovish in recent weeks.
A kind of “call my bluff” moment. Other countries (and investors) may have believed that he relied on his promise of customs. So boom, duty!
When the news came out, the stock market, where both Dow and Nasdaq fell hundreds of points.
Meanwhile, bonds did not make better. The 10-year bond yield jumped from about 4.50 to 4.58 on the news before relieving about 4.54 in the closure.
The market doesn’t like customs rates
Takeaway so far is that the markets do not like tariffs, whether it is the stock market or the bond market.
So there is no flight to security here. Bonds will not go up in price when investors flee shares. Both like because of the tariffs.
As for why, it is because most people think tariffs are inflationary and inflation is poor for bonds. It is evil their real returns and thus investors require a higher dividend (interest).
This means that investors in things like mortgage -backed securities (MBS) also require a higher benefit to compensate for inflation risks.
In short, the mortgage rates must rise to compensate.
Inflation can also damage equities by raising costs for businesses and consumers, which can lead to reduced consumer costs.
And the tax foundation believes that the announced tariffs will reduce economic production by 0.4% and raise the tax by $ 1.2 trillion, resulting in an average tax increase of about $ 830 per year. US household this year.
For the record, customs rates are intended to increase the import price, which can cause consumers to buy domestic goods instead. Theoretically, it must also encourage more homework production.
In reality, what can happen is the price of imports going up and transferred to consumers who continue to buy imports because that’s what they prefer.
How will tariff rates affect the mortgage rates?
The expectation is that customs will increase the mortgage rates, all else being equal. They are considered inflation and bonds do not like inflation, so increase.
As yield rises, interest rates rise, so it is best to expect a higher 30-year fixed priority rate.
This is why bonds have been so defensive since it became clear that Trump was the favorite to win the presidential election.
When the writing was on the wall, the 10-year bond yield began to rise due to Trump’s proposed policies such as customs.
In fact, the 10-year dividend, which is used as a bell for 30-year-old fixed priority rates, rose from approx. 3.65% in mid -September to as high as 4.80% in mid -January.
For large parts of the last decade, 30-year-old fixed priority rates were generally approx. 170 Basic Point (BPS) higher than the 10-year bond yield.
This spread accounts for increased risk due to things such as default or prepayment (if a borrower offenses or pays the mortgage loan early).
Usually it would attach the 30-year-old to approx. 6.25% using the old spread. But the priority spread has also expanded significantly and is closer to 250 bps.
So home buyers today face a priority rate closer to 7% instead.
If we assume that the 10-year bond yield goes higher due to the tariffs, which are probably the most likely scenario, the mortgage rates will also move higher.
Long history short, more tariffs, higher priority rates.
But don’t forget the other financial data, including things like unemployment, which can also affect bond prices and yields.
The big question is, will tariffs last and/or be adjusted?
Now, in terms of how much tariffs can affect the mortgage rates, we need to consider how long the tariffs will last. And if there will be exceptions.
Trump has reportedly already weighed the reduction of the tariff for imported oil. At the same time, there is a risk of retaliatory gaps and an all-out trade war with the countries involved.
So it really depends where we go from here. Does it get worse before it gets better?
But, and this is a biggie if the tariffs are more a threat and short -lived, the market can breathe a sigh of relief.
And we could see shares up again and bond yields interest down again, which would lower priority rates.
For the record, bond yield actually moved lower since Trump arrived in office and slipped about 30 BPS since mid -January.
This may derail the trend that was lower, which looked promising until the tariffs were revealed.
But if it is a call in my bluff moment and he is rapidly supporting it, it can be a lot of things.
In the meantime, you need to be defensive if you shop for a home loan, as mortgage rates are likely to be higher as the market digests the customs news.
(Photo: Tristan Taussac)
Before creating this site, I worked as a banking director of a wholesale loan in Los Angeles. My practical experience in the early 2000s inspired me to start writing about mortgage loans 19 years ago to help potential (and existing) home buyers better navigate the home loan process. Follow me on Twitter for Hot Take.
