Mountain Mortgage Guy: Russian actions quietly impacting U.S. homeowners (column)
August 8, 2018
Few people realize the impact of a trade war and political sanctions on home mortgage rates, but it's rapidly becoming apparent the two are connected. Russia, which has been the target of several U.S. sanctions recently, has made a very bold statement that it, too, can retaliate in ways other than slapping tariffs on U.S. goods going to Russia.
Russia holds (or did hold) about $100 billion of U.S. treasury bills. While that is a small percentage of the approximately $20 trillion in U.S. debt, it's still a significant amount. We owe China roughly 10 times that amount. Recently, the United States slapped some crippling sanctions on Russia and several of its major industries. It also limited U.S. banks from lending money to Russian businessmen. Needless to say, the Russians did not react kindly to these sanctions and are firing back in their own way.
Most notably, the Russians have been selling their U.S. Treasury bonds, about 90 percent of $90 billion, to be precise, over the last two months. While this has not been the entire driving force behind increasing bond yields (yields go up when supply goes up) and rising mortgage rates, it clearly has been a strong influence.
“Most notably, the Russians have been selling their U.S. Treasury bonds, about 90 percent of $90 billion, to be precise, over the last two months. While this has not been the entire driving force behind increasing bond yields (yields go up when supply goes up) and rising mortgage rates, it clearly has been a strong influence.”
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Mortgage money is raised in the bond markets and must compete for yields with U.S. Treasury bonds. When the supply exceeds demand for T-bills, the price investors pay drops and the inverse yield increases. Mortgage rates track the increase in the yields. Many T-Bills have seen as much as a 2 percent increase in yield the past two years, pushing mortgage rates up accordingly.
The Russian dumping of their T-bills has a direct impact on the supply and demand economics of T-bills and is part of the reason mortgage rates have jumped significantly the last few months.
There are other factors at play, as well, and one cannot lay the entire blame on Russia. Certainly the strengthening U.S. economy and concern about inflation are equal contributors. A potential concern to many is that other nations may follow Russian President Vladimir Putin's example and use their share of U.S. debt to retaliate against sanctions placed on their economies.
I once worked in international trade for several years, brokering deals on heavy equipment and other commodities. That experience taught me that tariffs and sanctions seldom produce the results hoped for in the long term; quite often they are harmful to many other aspects of a nation's economy. Let's hope the Trump administration realizes that every homeowner with a mortgage is being hit, as well.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.