Powell, Trump and Mortgage Rates

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As a general theme, the administration wants to improve sentiment going into midterms, right? We're going to have this very consequential midterm election. Household sentiment's very weak. Affordability. Is at the absolute top of their priority list.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is John Hill. He's the head of US inflation market strategy at Barclays. He joined us to talk about the Trump administration's efforts to bring down interest rates. We'll talk about the Federal Reserve. There could be tangents, pottery, dinosaurs, probably not those two specifically, but let's see what happens. Listening in is our audio producer, Alexis Moore. Hi, Alexis.

Hi, Jack.

Did you see that the 30-year fixed mortgage rate just hit its lowest level in 3 years?

What is it?

Well, I'm going to tell you, I'm going to give you a number and I want your immediate response. How excited does this rate make you on a scale from 1 to 30 years? 6.06%. You're not, you're not feeling it.

I mean, I really became cognizant of interest rates when they were in the 2s.

So it doesn't, it sounds like something, the lowest in 3 years. Okay. I think a lot of potential buyers are underwhelmed with that figure and they're having trouble affording houses and potential sellers might be locked into low rates. So they're not keen to take out a new mortgage somewhere else and pay double their current rate. And if nobody's selling, that's a shortage of supply. And that's even worse for affordability. And affordability has a lot to do with consumer sentiment. So the administration would very much like to bring down mortgage rates ahead of the midterm elections. It's trying. There's a newly announced big purchase of mortgage securities. Basically, mortgages get bundled together and turned into investments. People buy them for yield. And when a lot of people buy bonds, it puts upward pressure on the price. And as bond prices rise, their yields fall. That's just how the math works. So President Trump announced a $200 billion buy program. The Federal Housing Finance Agency Director Pulte, as in Pulte Homes, he confirmed that that'll be done by Fannie and Freddie in an effort to help bring down mortgage rates. But there's one problem, and it's the crux of our conversation coming up today. The spread between mortgage rates and Treasury yields is historically tight. Spread in this case just means the difference between one bond yield and another bond yield. Treasuries are considered a super low-risk investment, so their yields are often a starting point for other yields on other investments. I show the recent 10-year Treasury yield at just under 4.2%. So if you're talking to me about a 10-year bond yielding, let's say, 5%, I can assume that that's a high-grade issue. That's a high-quality bond. The spread to Treasuries is fairly tight. If you're showing me a bond paying 12%, that is as suspicious as, let's say, past-expiration sushi sold out of someone's trunk. Anyhow, so if the spread between mortgage securities and Treasuries is historically tight, and you wanna bring down mortgage yields, you got something in your way, treasuries. You're not gonna go below treasury yields. So you need to do something to bring treasury yields lower. And I hear you saying, aren't we doing that already? I heard the Federal Reserve is cutting rates. It's true, but the Federal Reserve directly affects short-term interest rates, overnight interest rates. Those sometimes get transmitted along the yield curve to longer issues. 5 and 10-year notes, 20-year bonds, but sometimes they don't. Just looking at the Treasury yield curve since the beginning of last year, we've seen 1-month yields come down by 0.7 of a percentage point, but 10-year yields are down by only 0.4 of a percentage point. So less of the oomph from those rate cuts is being transmitted to longer bonds. And you need those longer bond yields to come down because those are the ones that the mortgage market tends to follow. So why aren't longer bond yields coming down more? I can think of a couple of good reasons. Number one is that the federal deficit is humongous. We went into the hole by more over the past year than we did during the worst year of the global financial crisis in 2009. Back then it was emergency spending. Right now it's just regular spending. And that has investors worried about what's going to have to happen in the future to make those debt payments. Is there going to be a lot of inflation, for example? The second thing is that federal prosecutors have delivered a criminal subpoena to the Federal Reserve Chairman, Jerome Powell. I feel like that's the kind of thing that if I had said it at pretty much any other point in my career, we'd be facing financial collapse as a country right now. But markets are mostly shrugging it off. The subpoena relates to testimony that Powell gave to Congress last summer. Having to do with renovations at some of the Fed's office buildings. I don't think the details of the matter are shocking. I think this is widely considered to be a politically motivated action. The editorial board at the Wall Street Journal calls it lawfare for dummies, monetary edition. See, the president would like lower interest rates, as presidents often do. Lower rates are good for the economy, but the Federal Reserve has a clear mandate when it comes to setting the level of interest rates. It's supposed to keep inflation from getting too high and employment from getting too low. And it trades those things off and it makes decisions. And the president was badgering the Fed chair over not cutting rates fast enough. And the Fed has cut rates a handful of times, maybe not enough for the administration's liking. The Wall Street Journal cites sources saying that the idea for this subpoena came from Bill Pulte, the head of the Federal Housing Finance Agency. The Journal writes, presumably the gambit is to catch Mr. Powell for lying to Congress regarding the office renovations or scrounge for details in search of some other so-far undetected offense. They say this episode smacks of loyal underlings trying to curry favor with the president. I don't think it's particularly well thought out, and I'll tell you why. It's pretty important to have an independent central bank. If presidents always like to have low interest rates because it's good for economic growth, And if lower than warranted interest rates run the risk of inflation, and if we allowed, let's say, the White House to set the level of interest rates, we would be chronically at risk for runaway price growth. So you need economists who will set rates without regard for how it will play in upcoming elections. A criminal subpoena for a Fed chair is so highly unusual and the subject of the subpoena is so seemingly minor by comparison that investors can't really help but see this as the White House trying to pressure the Fed. And markets don't like that because, again, those two things should be separate. There's a contradiction here that's clear to see no matter what your politics. If you make investors think that there's going to be some White House takeover or strong-arming of Fed policy, that we're going to set interest rates unduly low, the bond market isn't going to like it. Investors are going to sell bonds and their yields are going to rise. And that is the opposite of what the administration is trying to accomplish. And the administration can control a lot of things, but the bond market is not one of them. Not easily, at least. Fortunately, we haven't seen a major jump in bond yields, and I can only guess as to why. This has been going on for a long time. In April of last year, Trump called Powell a, quote, major loser, and he posted on social media that his, quote, termination cannot come fast enough. Trump sought to remove Governor Lisa Cook from the Fed's board. He appointed loyalists to the Fed's board. So there've been a lot of opportunities for bond investors to panic over this issue. I guess the fact that they're not panicking suggests that they still think the Fed is doing its job based on the facts, not the politics. Powell's term as chair, by the way, expires in May. The president will appoint his replacement. That's a pretty extraordinary set of circumstances to keep in mind If you're trying to figure out where mortgage rates might be headed in the year ahead, normally you think about the state of the economy and inflation, but now you have to think this government seems to like a handsy approach to interest rates, including mortgages, whether you agree with that or not. So what might it try to do and will it work? And that's where John Hill from Barclays comes in. He's the head of inflation market strategy there. And he's been writing lately about possible ways to bring down mortgage rates. He says, if you wanna make something happen with mortgages, you're gonna have to make something happen with treasuries. Alexis, did that opening teaser, that appetizer on rates and the yield curve and Fed policy, did that put people to sleep? 'Cause that could, it could be dry or is it just me feeling sleepy? Which is it?

I think it was a lot for an amuse-bouche, but I think that People are wide awake. I hope I'm awake. I think you're sleepy though.

I did just have a big egg sandwich. I went double egg and that gets, that gets heavy. All right, we'll be right back with my conversation with John Hill at Barclays.

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Welcome back. The amuse-bouche is out of the way, as Alexis put it. Did I pronounce that correctly?

I guess.

What is the difference between— first of all, I forget what's an amuse-bouche and what's the difference between that and an appetizer? You know what?

I thought that they're the same thing. I've been using it as if they're the same thing. So we're going to say that they're the same thing and the listeners can correct us if we're wrong.

Right. To lower mortgage rates, think Treasuries. That's the kind of report headline that really gets my amuse-bouche. I said something dirty by accident, didn't I? That happens when I try to speak French. That happens. That title comes from a recent paper by John Hill. He's the head of US inflation market strategy at Barclays. I spoke with him recently about mortgages, bond yields, inflation, the Fed, and more. Let's hear part of that conversation now.

As a general theme, the administration wants to improve sentiment going into midterms, right? We're going to have this very consequential midterm election. Household sentiment's very weak. Affordability is at the absolute top of their priority list. They've made a variety of announcements about this. This can include the 10% cap on credit card fees, but a huge component of the affordability challenge is housing. And shelter. And so there's a question of what can we do on housing overall first, and second, before the midterms? Because really the medium to longer-term solution to all of this is we need more supply. We need more housing supply. We've underconstructed homes in the US, especially since 2008, and we need to build that. It's very hard to build that by the midterms. So instead, what are things that they can do that have a more immediate effect? And that's where these recent announcements come in. And the big one that got a lot of attention last week is that the president announced that he wants the housing agencies, Fannie and Freddie, to buy $200 billion worth of mortgage-backed securities. The goal of that is you drive the price up, you lower the yield on these MBS, and therefore that passes through to lower mortgage rates. Directionally, perfectly correct. The problem goes in the nuance in that You know, there are a variety of things. And first, some version of this idea has been percolating for months. So we've already seen the market begin to price this possibility starting, you know, as early as August, September last year. And so mortgage spreads to U.S. Treasuries, basically that extra yield that you get on MBS versus Treasuries are already quite low. They're quite tight. And so if you go ahead and you buy all this MBS, fine, you can tighten it further. But we're talking a number of basis points, not a number of percentage points here.

We should point out for anyone who, who hears this, who doesn't know, MBS, mortgage-backed securities, bundles of mortgages that have been turned into investments.

Yes, exactly correct. It's kind of the bedrock of a lot of the housing finance and will pass through to lower mortgage rates. But if the administration wants to get the average 30-year fixed rate from just over 6% down to something that's really going to improve affordability and sentiment, it's not going from 6.3 to 6.2, it's going from 6.3 to 4 or something of that ballpark.

That would be an eye-catching number. Exactly. But you, but to your earlier point, treasuries are, are supposed to be about the safest thing out there. So you should get a little more yield for buying just about anything else, including mortgage-backed securities. But if the spread between the two is now so squished, I guess your larger point is it's hard to bring down mortgage rates without doing something about Treasury yields. Have I got that right? And what can be done about Treasury yields?

I think this is going to be one of the most consequential topics in 2026. I know it's early. Probably that's going to change. But the stage very much feels set for the administration wants to get mortgage rates down. To do that, they need to get Treasury yields down. And so what can they do? You know, in the extreme, you could have some really blue-sky ideas. Think like yield curve control and stuff like that that we've seen in Japan. Where basically the government doesn't allow interest rates to go above a certain rate. That would be an absolute extreme example. We're not expecting that. Instead, there are other things that they can do that seem more pragmatic and more possible. And I guess I would bucket them into 3 categories. First is a regulatory side. Second is supply. Third is demand. So the regulatory side is basically, you know, after 2008 and in subsequent years, there's been all of these capital rules on what you need in order to hold some types of securities. You could tweak those to make treasuries more attractive. By making treasuries more attractive, they'd go up in price and therefore the yield would go down.

Just for folks who are hearing this, and if, if in case they're a little bit lost, when we're talking about treasuries, the types that we're talking about are maybe going out, let's say 10 years. So we're not talking about short-term interest rates and As you buy treasuries, if you get the price to go up, the yield on them comes down. That's just the math of how they work. So if you come up with a way to make them more attractive or more appealing to buyers, you can bring yields down. That's what you're talking about here.

Yeah, that's exactly right. And you can kind of do that with a regulatory channel, and that's already been happening. These type of regulatory adjustments take a long time. They can be huge amounts of money at stake, but it's not the kind of thing that's easy to rush. Before the midterms, right? And this is already in the price. This is already expected. So the regulatory channel, check that box and that it is happening and it's already in the price. So this gives us to supply and demand. The US Treasury can't tell people what to buy, right? What it can do is try to create a market structure that's more valuable, or it can buy back its own debt. And that's, it's a little bit cute, but in essence, the Treasury is sitting on a lot of money in its own account. It can take that money and buy outstanding treasuries, reduce the public supply, and that should have the effect of raising the price, lowering the yield. That's what they call their buyback program. They're already doing this.

And this is because if someone out there is wondering, doesn't the Fed control interest rates? It's because the Fed sets short-term interest rates, but whatever they say in the short-term yields, that doesn't necessarily transmit to those longer issues. It might not affect 10-year yields or 10-year yields might move the opposite way the Fed would like. So sometimes you have to do some twisting and some massaging to try to get the longer part of the yield curve to act the way you want. Have I got that right?

Yeah, that's exactly right. The Fed controls by and large overnight interest rates. And then, you know, one of the best approximations, say for 10-year treasuries, is the expected average of those overnight rates over the next 10 years. So it's that path of Fed policy. That's why everyone likes to talk about, is the Fed going to hike? Is the Fed going to cut? It really does matter for 10-year yields, but it's not the only thing that's going on. Supply matters, distribution of risk matters, demand matters, all these other factors. But the Treasury, through a buyback program, could put its thumb on that scale a little bit and try to influence 10-year Treasuries lower, thereby reducing Treasury yields. If Treasury yields themselves are falling, then mortgage rates start to fall.

Okay, so of your 3 ways to get the 10-year yield lower, we've, you've talked about the regulatory way, you've talked about demand, there was a supply way too?

Absolutely, and this in some ways is the easiest policy lever for the Treasury to potentially pull is that, well, the Treasury decides what Treasuries they want to issue. It's kind of in the name. And so if the Treasury wanted to reduce long-end supply, thereby driving up the price, driving down yields, it's possible that they could consider reducing coupon issuance. Now, this is speculative, and to be clear, our baseline expectation is that auction sizes stay largely constant. And the reason why, the reason why Treasury can't just go ahead and cut all the long-end auction sizes they want is we still have huge deficits. And if they stop issuing as much longer-term debt, they still need that money in order to fund these deficits. That either has to come from the front end or the belly of the curve. Think something like 2, 3, 5-year issuance. But it's not costless, but it is something that is starting to percolate in the macro narrative.

Okay, so I tried to talk about politics as little as possible. It makes me break out in an itchy rash, but it's hard to get away. This has been, this is kind of a handsy administration when it comes to, you know, interest rates and what the Fed is doing and that it seems to me. So do you have an opinion on this? And if you, if you don't, that's okay. But we've seen some sort of jarring headlines over the past week. The president wants interest rates to be lower. There've been a few cuts from the Federal Reserve already, but he's, he just seems generally displeased with the Fed chair. And now there's this, um, investigation from the government and it seems, I dunno, it's been described in various opinion pieces like putting pressure on the Fed to do what the government would like and so forth. And people have raised the possibility that that backfire. Maybe the bond market doesn't like that. Maybe that makes investors nervous. Maybe they sell the things that the administration would like them to be buying, and maybe interest rates do the exact opposite of what the government wants. Do you have any opinion on that? What do you make of all this?

So first, I would say that is one of the core questions right now. I think that is one of the most important questions for U.S. fixed income. And I would say that we kind of got a natural experiment in how the market would respond to some of that news last July. So if you remember last July, there are all these headlines and this was around part of the idea, you know, the president started to really put pressure on Powell. And what we saw is the market priced a higher probability of additional rate cuts. So the front end of the yield curve came down, but the back end sold off. So that meant that, you know, 30-year yield, 10-year yields, the kind of things that really inform corporate borrowing costs, household borrowing costs actually pushed higher. So even if there's a desire or push to get some policy rates, overnight policy rates lower, and maybe that trajectory for the next year or two, that doesn't actually necessarily mean that you get all interest rates in the U.S. Treasury complex lower. And, you know, a reasonable takeaway from that is if you're the administration, not only are you trying to get policy rates lower, you're also trying to think about ways to get aggregate yields lower, including that 5-, 10-, 30-year further out the curve. And this is where some of these other more creative policies come around as well. And so it's something where a lot of people focus on cuts, no cuts, but this is where stuff like Treasury issuance matters. This is kind of the conversation about the Fed's balance sheet decision, these type of bigger picture, more consequential, less binary things, but they still do lead into supply demand for U.S. fixed income. And you know, it's something where if I take a look at what markets are priced for right now, the market is basically not priced for policy rates to dip below 3%. And most people think that a neutral stance of policy, i.e., an overnight interest rate that's not restrictive, not accommodative, just kind of, you know, neutral with the stance of the economy, is somewhere 3 to 3.5%, error bands around that., and that's basically what the market is priced for, for the path of short-term interest rates. So I think that says something very, very compelling about the scale and significance and depth of Fed credibility when it comes to the interest rate path.

So the last thing I wanna ask you is, let's bring it home for somebody who is interested in doing something with a house this year, selling one, buying one, maybe they've been, sitting still for a while because they're, you know, locked in on a low mortgage rate and rates out there are too high and they're wondering what's going to happen with mortgage rates. So when you put together all of the possibilities that the administration has to try to affect the bond market and make some room for lower mortgage rates, what do you actually think might happen in the year ahead? Do you have a view? Does Barclays have a view on what the path is for mortgage rates going forward?

So I think the short answer to that is it is extremely hard to know and very, very hard to predict these kind of things. You know, I wish I could say—

But you've got a better shot than I do.

Yeah, I heard a joke once that 2 decimal points is proof that economists have a sense of humor, which I thought you might like. But I do think that there is— and this is where I get back to the broader pushes on affordability and it's on improving consumer sentiment., and this is clearly a very creative administration that comes up with a lot of ideas and pushes them through where people aren't necessarily expecting. So I, I guess I would say they have a variety of tools at their disposal, partly to get mortgage spreads tighter to treasuries, partly to get treasury yields down, or at least attempt to. But there are a lot of factors that go into what treasury yields are, some of which they can influence, some of which they can't. And I think this kind of gets to, you know, we're going to be sitting in this big macro conference while this president is giving this big speech in Davos. He's already teed up wanting to announce other things in this speech. I don't have any particular insight into what's going to be announced, but I would expect that this isn't the end of the story. There are a lot of different policy levers the administration can pull and will try to pull, and a lot of it has tried to focus on improving affordability. Going into November. So even though we're, what, 2 weeks into 2026, it feels like it's been a lot longer. And I expect this to be a pretty noisy few months while we're all trying to figure everything out.

Thank you, John, and thank you all for listening. If you have a question you'd like played and answered on the podcast, you could send it in. It could be in a future episode. Just use the voice memo app on your phone. Send it to jack.hough@barons.com. Alexis Moore is our producer. Pause here for applause. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. If you listen on Apple, you can write us a review. See you next week.

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