“If China wanted to hit us hard, they could unload treasuries. Is that a threat? Sure it is,” said Guy Cecala, executive chair of Inside Mortgage Finance. “They’re going to look at pushing levers and trying to put pressure ... Targeting housing and mortgage rates is a powerful driver of something like that.”
At the end of January, foreign countries owned $1.32 trillion worth of U.S. MBS, or 15% of the total outstanding, according to Ginnie Mae. The top owners: Japan, China, Taiwan and Canada.
China had already begun selling off some U.S. MBS last year, with the country’s holdings at the end of September down 8.7% year over year and down 20% by the start of December. Japan, which had shown gains in its MBS in September, showed a drop at the start of December.
If China and Japan were to accelerate those sales further, and if other nations were to follow, mortgage rates would rise even more than they are now.
“The concern, I think, is on folks’ radar screens, and being raised as a potential source of friction,” said Eric Hagen, mortgage and specialty finance analyst at BTIG. “Most investors are concerned that mortgage spreads would widen in response to either China, Japan or Canada coming in with a retaliatory objective.”
Widening spreads mean higher mortgage rates.