Donald Trump.
Credit: Reuters File Photo
By Jonathan Levin
In many ways, Donald Trump was elected to a second presidency as part of a cost-of-living backlash, and unaffordable housing was at the center of Americans’ frustration. High home prices and the highest mortgage rates since the financial crisis meant that as much as a third of the country was effectively locked out of the homeownership dream. That, in turn, helped explain why Americans gave the economy such low marks in consumer sentiment surveys and political polls even as official inflation statistics cooled and the stock market boomed alongside gross domestic product.
The early signs from mortgage and bond markets aren’t encouraging on that front. Trump will have to dramatically moderate his agenda if he’s going to meet voters’ expectations and, even then, his promise to drive mortgage rates down to 3 per cent or lower seems well out of reach in the absence of a sharp economic downturn.
At the time of writing, the yield on 10-year Treasury notes, a key reference for 30-year mortgages, was up 18 basis points to 4.45 per cent and hovering near the highest since July (with even more dramatic superlatives not far off). Even before his victory was sealed, mortgage rates had surged toward 7 per cent from close to 6 per cent partly on his improving prospects, and home-loan applications had been declining.
The reasons behind the moves weren’t particularly surprising. Throughout the campaign, Trump spooked most mainstream economists with his comments about 60 per cent tariffs on Chinese imports and duties of as much as 20 per cent on all others. He also promised mass deportation of undocumented immigrants, which could dramatically curb labor supply in key fields such as construction and child care, in addition to the toll it would take on families. Add to that the eye-popping deficit math of actually implementing Trump’s various tax promises (expanding the 2017 tax cuts, no tax on tips, etc.) and you can understand why inflation concerns have resurfaced and fixed-income traders have demanded a premium for the emerging risk.
Trump is very good at finding scapegoats for America’s problems, and I have little doubt that he’ll try that again.
In his first presidency, he famously berated Federal Reserve Chair Jerome Powell on Twitter for not lowering interest rates amid his trade war with China. “My only question is, who is our bigger enemy,” he said, Powell or China’s President Xi Jinping. Trump may well train his threats on Powell once again if borrowing costs remain elevated, but I don’t think it will help. After all, mortgage rates aren’t set at the Fed. The central bank’s half-percentage-point interest rate cut in September was met with a run-up in borrowing costs, as markets weighed both an improving US economy and the prospect of a second Trump presidency. And Trump will find it hard to bully the invisible bond vigilantes driving yields higher.
It’s possible, of course, that bond markets are overreacting. On the issue of tariffs, for instance, Trump’s apologists argue that the attention-getting numbers that Trump has bandied about in the campaign were really just threats to gain leverage in negotiations with America’s trade partners. Under this theory, the bond yields — and mortgage rates — should come down once everyone figures out what the president-elect is up to. Maybe so, but that’s inconsistent with the words out of Trump’s own mouth.
In an interview with Bloomberg News Editor-in-Chief John Micklethwait last month, Trump said: “To me, the most beautiful word in the dictionary is tariff, and it’s my favorite word.” And even if it really is gamesmanship, the ploy comes at the expense of first-time homebuyers who have been waiting patiently on the sidelines for years for an opportunity to enter the market. If Trump draws out the uncertainty or follows though with his threats, those buyers could be waiting for months or years more.
Mortgages may be the biggest household borrowing cost at stake, but they’re not the only one. His policy stance may also be reflected in auto loans and credit card rates, among others. Already, auto and credit card delinquencies are on the rise, especially among those ages 18-39. It is far from clear what the Fed itself would do about all of this, but it stands to reason that policymakers will at least slow the pace of cuts on its target rate while it awaits clearer signals, adding another weight on bond markets.
If Trump wants to fulfil the promises he made on the campaign trail, he’ll have to start by making peace with fixed-income markets. The sooner he does so, the better.