Why U.S.–China Tension Could Wreck Your Mortgage Budget

If you’re watching mortgage rates in hopes of buying a home this year, international financial shifts—particularly involving China—may be more important than the next Fed meeting.

Recent market activity and analyst commentary point to a potential ripple effect from China’s evolving investment strategy, particularly its holdings of U.S. mortgage-backed securities (MBS). These assets—made up of pooled home loans sold to investors—are tightly linked to how mortgage rates are set in the United States.

While trade relations and tariffs between the U.S. and China continue to draw headlines, it’s China’s quiet but significant reduction in MBS holdings that may pose a more immediate risk to home affordability.

How China influences mortgage rates

Foreign governments collectively hold about $1.3 trillion in U.S. mortgage-backed securities, according to recent data. China — along with Japan, Taiwan, and Canada — is among the largest international holders.

In late 2024, China reportedly reduced its MBS exposure by 8.7% year-over-year, and by early 2025, that decline had reached 20%. Analysts believe this trend could continue—whether as part of a strategic economic rebalancing or in response to shifts in trade and monetary policy.

“Most investors are concerned that mortgage spreads would widen in response to either China, Japan, or Canada coming in with a retaliatory objective,” said Eric Hagen, mortgage and specialty finance analyst at BTIG.

This concept of “widening spreads” refers to the gap between U.S. Treasury yields and MBS yields. When that gap increases, it drives up the cost of mortgage lending, even if interest rates from the Federal Reserve remain unchanged.

Why this matters to homebuyers

For prospective buyers, this seemingly abstract and far-flung financial development could translate into tangible consequences:

• Higher mortgage rates: With 30-year fixed rates already hovering between 6.75% and 7.25%, a widening of spreads could push borrowing costs even higher.
• Reduced affordability: Higher rates mean larger monthly payments, which could knock some buyers out of the market or reduce their purchasing power.
• Market uncertainty: Unclear signals from global investors—especially major players like China—may prompt lenders to price in extra risk, making rates more volatile.

Even more important than the actual sell-off is the uncertainty surrounding future moves. Analysts warn that the lack of visibility into how much MBS China could offload—and how fast—may be enough to rattle investor sentiment and put upward pressure on mortgage rates.

“The lack of visibility for how much they could sell and their appetite for selling—that would scare investors,” Hagen noted.

China’s role in a complex global picture

It’s important to note that China’s reduction in U.S. MBS exposure is not necessarily an act of retaliation. Analysts point to broader macroeconomic trends—including higher global interest rates, shifting central bank policy, and evolving foreign reserve strategies—as likely contributors.

Still, in a tightly interconnected global financial system, the effects of even a measured reduction in U.S. bond or MBS holdings by a major investor like China can have outsized impacts on domestic markets—especially housing, which remains sensitive to rate fluctuations.

What homebuyers should consider now

If you’re in the market to buy a home—or plan to be later this year—here’s what to watch:

• Lock in rates early: If you’re already pre-approved and see a favorable rate, consider locking it in. Volatility could increase in the coming months.
• Stay informed beyond the Fed: Mortgage rates are not driven solely by the Federal Reserve. Geopolitical and global investment shifts matter more than ever.
• Work with your lender on options: Explore rate buydowns, adjustable-rate mortgages (ARMs), or other tools that can offer more flexibility in uncertain conditions.

Bottom line

While the Fed still influences the direction of interest rates, today’s mortgage market is increasingly affected by global factors—including China’s shifting stance on U.S. mortgage-backed securities. For homebuyers, that means international developments can directly impact what you qualify for and how much home you can afford.

In this uncertain rate environment, the smartest move is to talk to a trusted lender. They can help you understand your borrowing power, explain how macroeconomic shifts affect your specific loan options, and offer strategies—like rate locks or buydowns—to help you stay ahead.

With the right guidance, you can make confident decisions, no matter what global markets are doing.