ROI-Trump's mortgage foray at odds with aggravating Treasuries: Mike Dolan

By Mike Dolan

LONDON, Jan 14 (Reuters) - If housing affordability is a priority for U.S. President Donald Trump in an election year, the contradictions in his administration's frenetic new year policy push seem a strange way of getting results.

Last week's plan to get federal housing agencies on a $200 billion buying spree of mortgage bonds looks unlikely to get mortgage rates down further by itself, according to many banks. And a fresh challenge to Federal Reserve independence potentially complicates efforts to push benchmark long-term Treasury yields lower.

With 10 months to the midterm congressional polls and just 33% of U.S. adults in December saying they approved of Trump's handling of the U.S. economy - the lowest rating of his presidency - the president has little ?time to make a tangible impact in an area seen as central to cost of living concerns.

Last Thursday, Trump's mortgage bond initiative clearly pointed in that direction. His announcement claimed that getting housing debt agencies Fannie Mae and Freddie Mac to buy the mortgage bonds with the liquid ?reserves on their balance sheets would "drive Mortgage Rates DOWN, monthly payments DOWN, and make the cost of owning a home more affordable."

Federal Housing Finance Agency Director Bill Pulte later said the buying had ?already commenced and that Trump would be announcing more initiatives on housing during his visit to the World Economic Forum in Davos next week.

Average 30-year ?fixed mortgage rates of 6.25% last week have fallen ?about 85 basis points over the past year but are still more than twice levels seen four years ago and remain above lows seen in September 2024.

The premium on these mortgage rates over 30-year Treasuries has narrowed by about 100 basis points over the ?past year, but many doubt there is much room for that gap to shrink further, even after the mortgage ?bond plan. Markets assume that the previous tightening already priced in the likelihood of last week's move.

LITTLE TRACTION

Barclays strategist Jonathan Hill reckons the new demand from government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac "is fully priced in" and that marginal tightening of spreads in mortgage-backed securities, and therefore in actual mortgage rates, would now be limited.

Even though some have ?likened the operation to the Fed's "quantitative easing" programmes of the last decade, the Fed itself is still ?currently running down its $2 ?trillion portfolio of mortgage bonds at a pace of about $15 billion a month.

Indeed, Treasury Secretary Scott Bessent told Reuters late last week that Trump's plan was simply to "roughly match the Fed, which has been pushing the other way." While the move would not cut mortgage rates directly, he added, it may help by further reducing the spreads on Fannie and Freddie ?over Treasuries.

However, Hill at Barclays said the way in which Fannie and Freddie "duration hedge" their exposure with swaps and fund purchases through short discount notes would neutralize the overall impact - unlike Fed QE forays.

He detailed other possible technical measures that may affect mortgage rates and housing affordability - including simply boosting housing supply, even if that would take far longer to bear fruit than this year's election timeline. But while all such headlines may make for good political optics in any case, "the totality is unlikely to push mortgage rates sufficiently low to unlock a more broad-based refi (refinancing) wave or return to levels closer to the 'norm' of the past 15 years," Hill told clients.

For that, he wrote, "it all comes back to Treasuries."

BACK TO BASE RATES

Getting Treasury yields down is a holy grail - and may even be as elusive given the full gamut of ?Trump's policies.

If the administration ?can't push down expectations for future Fed policy rates, it would have to try to lower the "term premium" on long-term borrowing instead. It could do that by increasing bond buybacks, shifting issuance away from longer-dated debt, and pursuing long-mooted bank regulatory changes.

But a lot of these adjustments have been tried or floated over the past year and, arguably, have also been significantly priced ?in already, as Treasury yields remained relatively contained through repeated shocks and disturbances in 2025.

And while long-term Treasury yields appeared to defy fears surrounding another fiscal expansion, tariff hikes, "hot" growth rates and Fed independence, they failed to decline markedly despite a resumption of Fed easing late last year.

The 30-year Treasury yield at just over 4.8% is exactly where it was on Trump's inauguration. The 10-year has fallen about 40 bps, but estimates of the 10-year term premium have climbed by about 30 bps in the process to almost 80 bps.

In that light, it may be more obvious why the administration is so impatient with the pace of Fed easing and is trying every which way to pressure the central bank to move faster and deeper.

Political interference in Fed policymaking of a kind seen already this week may eventually be the result, but it's not entirely clear that leaning on the Fed to slash rates or compromising its autonomy ?will do anything to get long-term Treasury yields lower.

Deep rate cuts now would have an impact on short rates - only to build up the premium in long-term debt if they overheat the economy in the process and prevent a return of still-elevated inflation to target. Indeed the prospect of having to tighten again to counter any resurgence is already creeping back onto the market radar.

If that transpired, the mortgage bond foray would just run into sand.

The opinions expressed here are those of the author, a columnist for Reuters.

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(by Mike Dolan; Editing by Marguerita Choy)