Today I’m jumping on a slippery slope… I’m seeing so much talk about what we are expecting out of the new administration, and what impact it could have on interest rates. I get it – some of these topics are very controversial and we don’t understand the fallout that it could have in the future.
What Impact Will DOGE Have On Mortgages?
One thing that is hovering out there that I want to discuss is about the Department of Government Efficiency (DOGE). They are saying that they can find a way to save half a trillion dollars, which is significant since our current deficit spending (as of last year) was $2 trillion. It’s important to note that the way The Fed pays for a deficit like this is that they issue treasuries, including the 10-year treasury which runs pretty closely with mortgage rates.
What You Need to Know About Mortgage-Backed Securities
I also want you to remember the simple economics 101 of supply and demand. Mortgage-backed securities are a bond, which is what sets mortgage rates. You also have treasuries, which are essentially in competition with bonds because they have a similar investment profile.
So, when you have to sell an extra half a trillion dollars in treasuries to pay for the deficit, then it is going to drive interest rates up. So, what do you do when there is a higher supply of something? For example, if there are a bunch of widgets going into the market that need to be sold, you are going to have to drop that price to get people to buy it.
Remember, with bonds, the price runs inverse to the interest rates. So if you drop the bond price, it means interest rates are going up. That’s exactly the situation here.
If DOGE goes in and finds half a trillion dollars, that’s a lot of bonds that don’t have to get sold from the treasury. So, that should theoretically (based on supply and demand) allow for a higher price, which will allow for lower interest rates. Then it should bleed over into mortgages as well.
We Can’t Predict the Full Impact
Generally speaking, I agree that if they can find a bunch of wasteful spending, then please do it! I also fully acknowledge that there will be some fallout. If you take a chainsaw to something, then you’re definitely going to get the tree to come down – but it might also bring down a bunch of other things with it. There’s a whole conversation around this topic that we won’t get into today.
But the point that I want to make is that if they find this level of wasteful spending, fix the problem, and don’t replace it with other wasteful spending, then it should be good for interest rates.
I know this whole situation is complicated, but hopefully this explanation helps you understand it. I’m personally on board for reducing wasteful spending, especially if it has a positive impact on mortgage rates.