Rates ticked upwards immediately after the announcement – but the market could settle soon
A 90-day reduction in tariffs announced Monday signaled a temporary pause in the US-China trade war – and while an initial bump in mortgage rates followed as Treasury yields rose, hopes are high that the pause could lead to a trade agreement and calm financial markets.
The immediate rate increase may cause a short-term reduction in mortgage applications this week but a top economist believes that if this pause leads to a full-blown deal between the countries, both mortgage rates and inflation could be reduced.
Shelly Antoniewicz (pictured top), chief economist with the Investment Company Institute (ICI), said she wasn’t surprised to see rates tick up slightly based on the good news out of the negotiations.
“Mortgage rates are a bit higher today based on the US and China tariff news,” Antoniewicz told Mortgage Professional America on Monday. “This isn’t too surprising as mortgage rates tend to follow Treasuries. Treasury yields rose today as market participants interpreted the suspension of high tariffs between China and the US as good news for the US economy.”
The market has been volatile since the Trump administration announced tariffs on dozens of countries in early April.
The president doubled down on tariffs against China in particular, raising those levies to 145%. Both countries have agreed to drop tariffs to 10%, which means the US charge on Chinese imports will be 30% including a punitive fentanyl-related levy.
Antoniewicz hopes the 90-day reduction could lead to a permanent trade agreement.
“If the tariff suspension holds and the US and China come to a mutually agreed upon permanent trade agreement, this will certainly calm markets,” she said.
Reduced inflation and lower rates could be major benefits
In addition to potentially soothing financial markets, Antoniewicz said a deal could also stave off the chance of a surge in inflation.
“A permanent trade agreement would also be good news on the inflation front,” she said. “Lower tariffs, below the punitive 145% and 125% rates, would mean smaller increases in prices from businesses either partially or fully passing through the tariffs. Also, consumers’ short-term and long-term inflation expectations would likely come down.”
If inflation reduces, Antoniewicz believes the Federal Reserve could resume future rate cuts. The Fed held steady last week, and the markets are now betting on only two rate cuts for the rest of the year, after initially projecting up to five decreases.
“If inflation remains subdued and on track to the 2% target, the Fed can resume cutting the federal funds rate,” she said. “Longer Treasury yields would likely also come down, and with them, mortgage rates.”
Eric Hagen of BTIG flags ‘abnormal’ conditions as high MBS spreads clash with easing rate volatility. Foreign exits, tariffs, and Fed runoff could keep pressure on mortgage rates.https://t.co/5fI5ZI3Zzb
— Mortgage Professional America Magazine (@MPAMagazineUS) May 12, 2025
Antoniewicz believes that if the two countries can come close to a deal within the next 90 days, they might consider extending this reduction to finalize a deal, rather than potentially causing further market turmoil.
“The US and China have very strong economic incentives to work out or make substantial progress on an agreement during the next 90 days,” she said. “I would expect that if an agreement isn’t fully done within 90 days, but the two sides are close, they would issue an extension rather than put their respective economies at risk.”
Unlikely that China would sell off MBS stockpile
One of the underlying issues in this standoff is that China holds a substantial amount of US mortgage-backed securities (MBS). A selloff of those securities could significantly disrupt mortgage rates in the US.
“China currently holds approximately $240 billion in agency mortgage-backed securities,” Antoniewicz said. “Should China decide to liquidate a substantial portion of these holdings, it would likely flood the market with supply, driving MBS prices lower and pushing yields higher. Given that mortgage rates are influenced by both the 10-year Treasury yield and MBS yields, such a move could result in higher borrowing costs for US homeowners.”
However, Antoniewicz believes there are several reasons why China would not make this move, even if tariff negotiations fall through.
“Could China make a significant move in the US debt market?” she said. “Certainly, but the more pertinent question is whether the likelihood of such an action is meaningfully greater than zero, or still quite remote. While the possibility exists, there are several strategic risks that could dissuade China from acting too aggressively.”
Because China holds three times more US Treasuries than Agency MBS, a large-scale selloff would impact both global markets and devalue its remaining holdings, according to Antoniewicz.
“It could trigger instability in global financial markets, including China’s own market,” she said. “It would lead to a strong yuan, which undermines the competitiveness of Chinese exports. And it would ultimately strain trade relationships not just with the US, but with other key partners as well.
“China’s broader economic priorities, particularly its need to maintain a stable exchange rate with the US dollar and support its export-driven economy, may significantly limit its willingness to use its US debt holdings as a geopolitical tool.”
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