We are in the midst of a global bond market sell-off that has erased over $1 trillion of value from bonds all across the world, including US mortgage bonds. When mortgage bond prices decline, mortgage rates go up… and mortgage bond prices have fallen off a cliff recently (see chart).
Here are three reasons why:
1 – Risk of Inflation Due to Tariffs
A “tariff” is a tax on foreign goods and services. Most free trade agreements reduce or eliminate tariffs. Mr. Trump has promised to scale back or exit many of our country’s free trade agreements that are currently in place. If this happens, it would cause the prices of foreign goods and services to go up considerably. This would then create inflation in the US economy. When the market is worried about inflation, bond prices decline and interest rates to go up.
2 – Risk of Large Increase in the Supply of Bonds in the Market
Mr. Trump has promised to lower taxes and increase government spending. This will most likely cause a large increase in government borrowing. The market is worried that a large supply of bonds will flood the market next year. For details, see my article called, A Special Report on the US National Debt.
3 – Risk of the Fed Exiting the Mortgage Bond Market
The Federal Reserve is currently the largest buyer of mortgage bonds in the market. As the economy grows and inflation picks up, the Fed will likely stop or reduce their purchase of mortgage bonds. In light of Mr. Trump's economic policies, the market is becoming concerned that this may happen sooner rather than later. For more details, see my article called, How the Fed Impacts Mortgage Rates.
Please contact me for more details, or for my daily market update.