I knew I was going to have to write this post at some point during Trump’s second term.
And here we are, only 10 days in. In case you didn’t hear, the Trump administration has announced new tariffs that go into effect tomorrow.
White House press secretary Karoline Leavitt said Trump will be implementing 25% tariffs on both Mexico and Canada, along with 10% tariffs on China.
There was word the White House was considering waiting until March 1st instead, to allow time to possibly negotiate. But Leavitt said that was “false.”
Now it’s full steam ahead on tariffs as of February 1st. And guess what? Bonds didn’t like it, which means mortgage rates likely won’t either.
Call My Bluff on Tariffs
As noted, there was some confusion about when the tariffs would actually roll out, with some saying March 1st.
That’s an important detail because it’s not just about 30 days, but rather an additional month to negotiate and even hold off on tariffs entirely.
But on the one hand it’s a good thing if they we’re inevitable because there will be no more guessing, no more waiting with bated breath.
There’s been so much speculation about these tariffs since late last year that in a sense it’s somewhat of a relief to finally just get them over with.
There’s a good chance Trump abruptly delivered them after coming off a bit more dovish in recent weeks.
A sort of “call my bluff” moment. Other countries (and investors) may have thought he was backing down on his promise of tariffs. Then boom, tariffs!
When the news came out, the stock market tanked, with both the Dow and Nasdaq falling several hundred points.
Meanwhile, bonds didn’t fare any better. The 10-year bond yield jumped from around 4.50 to 4.58 on the news, before easing to around 4.54 into the close.
The Market Doesn’t Like Tariffs
The takeaway so far is that the markets don’t like the tariffs, whether it’s the stock market or the bond market.
So there’s no flight to safety here. Bonds aren’t going to go up in price as investors flee stocks. Both might suffer because of the tariffs.
As for why, it’s because most think tariffs are inflationary, and inflation is bad for bonds. It’s hurt their real return, and thus investors demand a higher yield (interest rate).
This means investors in things like mortgage-backed securities (MBS) also require a higher yield to compensate for inflation risks.
Simply put, mortgage rates must go up to compensate.
Inflation can also hurt stocks by raising costs for businesses and consumers, which can lead to reduced consumer spending.
And the Tax Foundation believes the tariffs announced will reduce economic output by 0.4% and raise taxes by $1.2 trillion, resulting in an average tax increase of about $830 per U.S. household this year.
For the record, tariffs are intended to increase the price of imports, which might drive consumers to buy domestic goods instead. Theoretically, it’s also supposed to encourage more homegrown production.
In reality, what might happen is the price of imports goes up and is passed onto consumers, who continue to buy the imports because that’s what they prefer.
How Will Tariffs Affect Mortgage Rates?
The expectation is tariffs will increase mortgage rates, all else equal. They are considered inflationary and bonds don’t like inflation, so yields rise.
When yields rise, interest rates go up, so it’s best to expect a higher 30-year fixed mortgage rate.
This is why bonds have been so defensive since it became clear that Trump was the favorite to win the presidential election.
When the writing was on the wall, the 10-year bond yield began ascending because of Trump’s proposed policies like tariffs.
In fact, the 10-year yield, which is used as a bellwether for 30-year fixed mortgage rates, increased from around 3.65% in mid-September to as high as 4.80% in mid-January.
For much of the past decade, 30-year fixed mortgage rates were generally about 170 basis points (bps) higher than the 10-year bond yield.
This spread accounts for increased risk due to things like default or prepayment (if a borrower refinances or pays the mortgage off early).
Normally, it would put the 30-year fixed at about 6.25% using that old spread. But the mortgage spread has also widened considerably and is closer to 250 bps.
So home buyers today are facing a mortgage rate closer to 7% instead.
If we assume the 10-year bond yield is going higher due to the tariffs, which is probably the most likely scenario, mortgage rates will also move higher.
Long story short, more tariffs, higher mortgage rates.
But don’t forget the other economic data, including things like unemployment, which can also affect bond prices and yields.
The Big Question Is Will the Tariffs Last And/or Be Adjusted?
Now as for how much the tariffs might affect mortgage rates, we have to consider how long the tariffs will last. And if there will be exemptions.
Trump has reportedly already weighed reducing the tariff for imported oil. At the same time, there is risk of retaliatory tariffs and an all-out trade war with the countries involved.
So it really depends where we go from here. Does it get worse before it gets better?
But, and this a biggie, if the tariffs are more of a threat and short-lived, the market could breathe a sigh of relief.
And we could see stocks up again and bond yields back down, which would lower mortgage rates.
For the record, bond yields were actually moving lower since around the time Trump got into office, sliding about 30 bps since mid-January.
This might derail that trend lower, which was looking promising until the tariffs were unveiled.
However, if it’s a call my bluff moment, and he backs off quickly, it might be much ado about nothing.
In the meantime, be defensive if you’re shopping for a home loan, as mortgage rates will likely be higher as the market digests the tariff news.
(photo: Tristan Taussac)
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 begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
