As I’ve been saying for a while now, all the potential bad news (regarding mortgage rates) has been largely priced in over the past couple of months. And then some!
Meanwhile, anything that could be positive for mortgage rates, such as lower inflation and higher unemployment, has been largely ignored. Rates can’t seem to catch a break.
Simply put, we have experienced a very defensive bond market recently, which has caused consumer mortgage rates to rise.
No one wanted to take the risk in the face of the radical economic changes proposed by the new administration.
But as I suspected, many of the much-talked about measures, like tariffs and trade wars, may not come to fruition, which should help mortgage rates return to their downward trajectory.
Treasury Secretary Bessent seen as less inflationary choice
Without getting too confused here, the appointment of Treasury Secretary Scott Bessent has allayed inflationary fears.
He is seen as a less volatile and more conservative choice to implement some of Trump’s ideas without ruffling as many feathers.
This involves cutting government spending and using the threat of tariffs to improve trade relations. All this tends to slow inflation rather than increase prices.
Lower inflation is good for bonds, and therefore for mortgage rates, because they follow the yields of longer-dated bonds, such as 10-years.
Before the announcement, there was much fear about Trump’s policies, which include tax cuts and a trade war with China and other countries.
Specifically, its prices are considered inflationary in that costs are generally simply passed on to consumers.
And given that inflation has been the main concern for the economy in recent years, the idea of reviving it has led to a sharp increase in the 10-year yield.
It rose nearly 90 basis points in less than two months, sending the 30-year fixed rate from around 6% to more than 7%.
Before Trump’s victory, it looked like 30-year rates were once again destined for the 5% range.
Many argue that mortgage rates around 5 or more would normalize the real estate market and bring back buyers.
In hindsight, this drop was short-lived, but it could receive a second chance via a more balanced budgetary approach led by Bessent.
3-3-3 plan, but maybe no 3% mortgage rates
One of Bessent’s main talking points is his “3-3-3 plan.”
These include reducing the budget deficit to 3% of GDP by 2028, targeting economic growth of 3% through reduced regulation and increasing domestic oil production by 3 million barrels per day.
This simplistic plan likely appealed to Trump, even though Bessent had ties to Democrats in the past.
But this three-pronged approach appears to be positive for bonds because it is anti-inflationary.
A reduction in government spending and a more conservative approach to the looming trade war and tariffs could ease inflation fears.
Higher oil production could also lead to lower prices for consumers, since production costs are generally passed on to the end user.
While this all sounds pretty good, it’s important to note that this is all speculative as well.
So a return to 3% mortgage rates might be the “3” that doesn’t really happen under this plan.
However, another of Bessent’s ideas is to get foreign countries to buy long-term U.S. government debt.
This is considered “pay in advance» to access the vast defense umbrella of the United States.
Renewed demand for Treasuries could push down 10-year bond yields, which match 30-year fixed mortgage rates very well.
In short, his proposals could reverse the recent rise in bond yields and return them to their downward trajectory.
If you recall, the 10-year yield was near 3.50% in mid-September, before the election took center stage.
Assuming the nearly 100 basis point hike proves unwarranted, yields could return to these levels.
They could actually fall even further if the trajectory were restored.
Sprinkle in some compression in the spreads between mortgage rates and bond yields and you would actually find yourself in the top 4 for a 30-year fixed rate.
Remember that with this nomination we will now be speculating in a different direction and that ultimately what really matters (as always) is the economic data.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) buyers better navigate the home loan process. Follow me on Twitter for hot takes.