MW Here's a bigger risk for the housing market than what the Fed could do to mortgage rates

By Joy Wiltermuth

There's been 'euphoria' lately in mortgage bonds with government backing, according to BofA Global

Federal Reserve tools could ease mortgage rates, but they also could risk another boom-and-bust cycle, says Mizuho.

Investors shouldn't get too bullish about the idea of the Federal Reserve dusting off its tools to artificially lower U.S. mortgage rates and lift the weak housing market.

That's the thinking of Steven Ricchiuto and Alex Pelle, U.S. economists at Mizuho Securities, who said in a Tuesday client not that they were sympathetic to the American dream of owning a home, but also wary of any steps by the central bank that could risk stoking another boom in the housing market that could end badly.

"There is no doubt that the Trump administration would like to see lower rates across the yield curve and claim that high rates have been a detriment to the longer-term strength of the economy," Ricchiuto and Pelle wrote.

They also think mortgage rates currently in the 6.26% area aren't high by historical standards - only the COVID pandemic's lows. Furthermore, members of the U.S. central bank's Federal Open Market Committee, which sets rates and manages other forms of monetary policy, have fresh memories of the subprime-mortgage boom and bust nearly two decades ago, they said.

"As such, it would be surprising if the [FOMC] were to use its quantitative tools to artificially depress long-term rates to try to jump-start housing," the Mizuho team wrote. "Moreover, the home-affordability problem is more a home-price issue than a mortgage-rate issue."

Bond-market 'euphoria'

Enthusiasm around lower rates helped fueled "euphoria" in the bond market ahead of Federal Reserve's first interest-rate cut in nine months last week, according to strategists at BofA Global.

That rallied the nearly $10 trillion market for government-backed mortgage bonds, with the "current coupon" spread recently pegged at about 122 basis points above the risk-free Treasury rate, versus closer to 160 basis points in April. That helped mortgage rates fall, which left borrowers rushing to refinance.

Read: Homeowners pounce on falling mortgage rates, with more opting for risky, adjustable-rate loans

Since most new mortgages end up packaged and sold to investors as bonds with government guarantees, the "agency" mortgage-bond market serves as a lynchpin of housing finance.

That's why bond giant Pimco told MarketWatch in early September that one way to quickly reduce mortgage rates would be for the Fed to consider reinvesting proceeds from its maturing mortgage bonds back into the sector, instead of Treasurys.

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

An even more aggressive approach would be for the Fed to restart its bond buying in the mortgage sector.

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

The Vanguard Mortgage-Backed Securities ETF's VMBS total return was 6.52% so far this year, according to FactSet, while it was closer to 7.03% for the Janus Henderson Mortgage-Backed Securities ETF JMBS over the same stretch.

The Fed currently owns about $2.7 trillion of government-backed mortgage bonds, down from a peak of nearly $3 trillion in 2022.Fed Chair Jerome Powell has said the central bank eventually wants to get to a Treasury-only balance sheet as bonds roll off and mature. Any changes could have big ramifications for markets.

The Mizuho team said that any reinvestment shift back into mortgage bonds could lower mortgage spreads, but that it likely wouldn't be enough to "move the needle on home demand," given that mortgage rates aren't far off "traditional levels."

On the other hand, reduced volatility in the Treasury market lately and the rally in mortgage spreads has already helped bring 30-year mortgage rates closer to their one-year low of about 6.08% from last September.

That matters because the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was at 4.14% on Tuesday, off its roughly 3.66% low roughly a year ago, but well above its summer high near 4.5%. The 10-year Treasury rates serves as a peg for pricing new 30-year home loans.

The Trump administration also has been talking about eventually privatizing housing giants Freddie Mac (FMCC) and Fannie Mae (FNMA) and expanding mortgage credit.

"The problem for the administration is that the banking reforms which followed the financial crisis were designed to reduce speculation and the risks banks take on in originating mortgage loans," the Mizuho team wrote.

"This dynamic helped curtail the supply of homes on the market, while COVID demand subsequently pushed home prices out of reach for many would-be owners."

-Joy Wiltermuth

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September 23, 2025 15:31 ET (19:31 GMT)

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