This long-shot move could get the 30-year mortgage rate to 5% next year, says BofA Global

By Joy Wiltermuth

Will the Trump administration convince the Fed to use its balance sheet to tackle high mortgage rates?

Government-backed mortgage bonds have rallied as investors consider the odds of the Federal Reserve buying up the assets again.

Investors have been warming to the idea that the Trump administration might try to cajole the Federal Reserve into buying government-backed mortgage bonds once again.

That's coincided with a fresh rally in the roughly $10 trillion market for government-backed mortgage bonds on Wall Street, as well as optimism around the potential for a 5% 30-year fixed-rate mortgage next year.

While the recent drop in the benchmark 10-year Treasury yield BX:TMUBMUSD10Y to about 4.03% has helped, the "current coupon" mortgage-bond spread also has retreated to about 120 basis point as of Monday, from closer to 145 basis points in early September.

Most U.S. mortgage loans are priced off the 10-year Treasury rate, plus a spread, to help compensate bond investors for risks associated with acting as a creditor in the housing market. When both fall, borrowing costs in the housing market typically follow.

A team of BofA Global strategists led by Chris Flanagan said they believe the rally "reflects increased market-implied probability that the Fed once again engages in MBS QE," in a Monday client note, using shorthand for agency mortgage-backed securities, or bonds, and quantitative easing, or bond buying that adds to the size of the Fed's balance sheet.

"The fact that the Trump administration is considering declaring a housing emergency adds credence to this view," they wrote, adding that they also can see the administration wanting to get the 30-year mortgage rate down from around 6.35% recently to about 5% before the 2026 midterm elections. But they also said "greater control of the Fed by the Trump administration would likely be necessary to facilitate renewed extraordinary monetary policy."

Almost 30% of U.S. mortgages now have a rate of 5% or higher, according to Realtor.com. Getting the 30-year mortgage rate down to that level could reignite a refinancing boom.

Treasury Secretary Scott Bessent said in early September that "everything was on the table" in terms of potential strategies the White House might use if a national housing emergency is declared, in an interview with the Washington Examiner. The Treasury didn't respond to a request for comment for this article.

Read: 5 ways the Trump administration could use declaring a national housing emergency to help home buyers

Yet convincing the Fed to use its balance sheet to tackle high mortgage rates still looks to be a long shot, given that Chair Jerome Powell has talked of getting to a Treasury-only balance sheet as a goal. Powell's term also doesn't end until mid-2026.

"It is not, in my opinion, a likely scenario," said Nick Travaglino, a portfolio manager and head of securitized credit at Nuveen. It took millions of people being laid off during the onset of the COVID pandemic to spur the most recent bond buying at the Fed, he said, and a global financial crisis before that.

Furthermore, using the Fed to get mortgage rates lower without adding more housing supply risks pushing up home prices and "making it equally unaffordable in the future as it is today," he said.

"That said, the Trump administration has been unpredictable," Travaglino said. "I would say it has to be a consideration."

With the housing market sputtering, investors have been coming up with their own ideas on how to tackle the housing affordability issue, as MarketWatch reported earlier this month.

Read: Here's one way the Fed could lower mortgage rates almost overnight - and it's not the rate cut Trump wants

A proposal from Citrini Research also calls for existing caps at Freddie Mac (FMCC) and Fannie Mae (FNMA) to be lifted as part of the Trump administration's privatization push so they can buy up more of the mortgage securities they help create.

Travaglino at Nuveen said a more targeted approach would be to tweak guarantee fees at housing giant Ginnie Mae for first-time homeowners to help make those mortgages more affordable.

Meanwhile, another thing helping rally government-backed mortgage bonds has been Trump's "liberation day" tariffs in April, which sent investors looking for safety and "tariff-remote" strategies like mortgages, Travaglino said.

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-15-25 1726ET