Last week, President Donald Trump demanded that “Interest rates immediately fell” while spoken to the World Economic Forum in Davos, Grund spoken Switzerland.
He mentioned the falling price of oil as a driver for this to happen with his “historic victory” in the recent presidential election.
The general idea is that lower inflation should initiate lower interest rates, which is basically how it works.
However, the big question is why would inflation be lower during Trump’s second period?
Due to positive development such as lower public spending or due to an economic crisis?
Bond yields fall when AI shares fall
This morning, the stock market sold as AI companies that were nosed, driven by news of a Chinese AI company called Deepseek.
Long story short, the early roof is that Deepseek has revolutionized AI by relying on inference time computing that uses far less resources and computing power.
As such, chipmakers such as stock market Darling Nvidia (Nasdaq: NVDA) could be under pressure if the demand for their chips proves to be excessive.
Of course, the counter -argument is that more efficiency leads to higher use. This phenomenon is known as “Jevons Paradox.”
This means that AI could become even more popular, which eventually leads to even greater chip demand, despite falling prices where the end result is higher sales/profits for these companies.
So you might not want to get too caught by this fast moving story if they try to see the direction of the economy or stock market.
However, the questioning of soaring valuations in the stock market and the concentration of only a few names known as the magnificent seven.
If investors suddenly decide that shares are too expensive, we could see the traditional flight to security in bonds and thereby increase their price and lower the yield.
And long -term fixed priority rates are likely to follow them lower.
What about Trump’s customs threats?
Another development that took place this week was a new customs threat against Colombia, related to deportations.
The Trump administration had threatened to introduce duties of up to 50%if the country returned withheld Colombian migrants, but the Colombian government eventually supported.
As a result, the customs threats were just that, threats. And it starts to make me wonder if they will be for other countries too.
The bond yield increased in October when Trump became an optional trunner and his expected policies pointed to higher inflation.
The interest rates move higher when inflation expectations are high and the tariffs are said to be inflationary.
But if it turns out that the tariffs are actually not realized or are less aggressive, fears baked in bond yield can relax.
The 10-year bond yield ran around 100 basic points (BPS) since the beginning of October from 3.75% to 4.75% before coming down about 20 bps recently.
If this continues, the mortgage rates will also ease. And they already have, driving down from 7.25% to approx. 7%.
The next stop could be back in the high 6s if investors remain creepy. Or if financial reports continue to show inflation that falls and economic cooling. And that’s the rubbing.
Weaker economy = lower priority rates
Trump may have his desire for lower priority rates if the economy shows signs of weakness.
Assuming the stock market is going down and investors are flowing to bonds, lower priority rates can be one silver lining.
But it’s unclear if Trump would see it as a win. Of course, it can help more existing homeowners refinance at lower rates.
And some potential home buyers may also see it as an opportunity, even if the wealth effect loses its shine thanks to a less valuable stock portfolio.
However, the economy will ultimately be more important than low priority rates.
So really the key will tray the needle and get to a point where 30-year-old fixed rates are lower, but not because of a faltering economy.
Lower, because inflation has fallen, the threat of tariffs was excessive, and public spending is actually not as poor as originally feared.
If Trump is able to pull it off, it will be a positive one around. The thing is, it may mean that you will have to temper your expectations of the mortgage.
This scenario can result in low-6% mortgage rates, perhaps high 5s, but not a return to the golden age of 3% priority rates.
Read on: Does the president put the mortgage rates?
