Tariffs Impact On Mortgage Rates
How Tariffs Impact Mortgage Rates. Investors in long-term bonds seek to model long-term inflation rates, and the long-term demand to borrower money, which are the two key criteria they use when deciding what is the right price to pay to buy a 10-year Treasury or 30-year MBS (Mortgage-Backed Securities) bonds.
Not knowing how much tariffs may increase or not, and how they could apply differently to different countries makes it almost impossible for bond market investors to model the expected level of economic activity and inflation rates for the U.S. and the other top world economies.
If another country has a $10 billion monthly trade surplus with the U.S. and future tariff negotiations result in the monthly trade balance going to near zero, that means the other country is now losing the economic value of the number of jobs and revenue associated with supporting the manufacturing of $10 billion of goods every month. For the trade balance to get near zero, the other country must either stop exporting $10 billion of goods to the U.S. every month, or else have an increase of $10 billion of U.S. goods sold to their domestic markets each month, thus displacing $10 billion of goods manufactured by their own businesses for their own citizens. Either way the other country is taking an economic hit to their GDP for the value of total revenue they received from producing $10 billion of goods each month.
When does the fun with Tariffs end? The deadline imposed by President Trump on most all U.S. trading partners is July 7, otherwise a sharp increase in U.S. tariffs will go into effect. World leaders know after the U.S. Senate voted 48-47 a few weeks ago that President Trump does have the authority to negotiate tariffs under the National Emergencies Act.
Democratic party Senators had asked the Senate to vote that the U.S. is not in a state of emergency related to U.S. trade deficits, and therefore President Trump does not have the authority to negotiate tariffs and trade agreements under the National Emergencies Act. The Senate voted 47-47, with Vice President JD Vance breaking the tie to vote 48-47 no on the Senate bill. There was then a separate vote also on a 48-47 margin, to place the bill into a committee, which effectively prevents the bill from being reintroduced at a future time.
Prior to this vote, world leaders were uncertain if Trump had the legal authority to impose unilateral tariffs, so it was perfectly logical that they would not need to rush into negotiating a new trade agreement that would result in smaller or zero trade surpluses with the U.S. and then have a negative impact on their economy.
It is likely in the next 41 days that most if not all top U.S. trading partners negotiate trade deals with the U.S. designed to bring more balanced trade levels and a long-term increase in U.S. manufacturing, particularly in industries critical to the defense and future sustainability of the U.S. If a few top trading partners publicly announce that agreements are reached, this will increase the pressure on the remaining trading partners to also reach an agreement, otherwise the sharp increase in tariffs will only apply to them, possibly stopping all trade and this would have a far worse economic impact than getting to a zero balance and continuing to trade with the U.S.
In my opinion, we will likely continue to see elevated levels of daily price volatility in the stock and bond markets over the next 41 days as good and bad news surprises hit the markets, almost daily, with respect to tariff negotiations. As the terms of new deals become public and details become known to the markets, this will allow bond investors to better model future economic and inflation expectations, improving the price they are willing to pay to buy a bond, and we should see reduced daily price volatility in mortgage rate sheets. It is also possible that market’s “uncertainty premium” which is arguably built into the price of long-term bonds today, could go away when the tariff issue is fully resolved, and this could provide a little decline in mortgage rates.
“This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company."
