President Trump Tax Cuts Lead Mortgage Rates to Soar

Today, we saw the first action towards President Trump tax cuts. President Trump said to expect an announcement about tax cuts in two to three weeks. As a result of the announcement, mortgage rates moved a little higher after the comments.

President Trump Tax Cuts Increase Wealth & The Budget Deficit

The President Trump tax cuts present to reasons for negatively impacting mortgage rates. First, the tax cuts increase the wealth of the affected individuals or businesses. When doing so, the tax cuts leave individuals and businesses with more money to spend.

With additional funds, the economy receives a boost in activity. Overall, the economic boost increases the outlook for future inflation. Typically, mortgage rates rise as expected future inflation rises. Higher inflation further erodes the value of a mortgage’s future cash flows.

Secondly, the tax cuts increase the budget deficit, at least initially. In doing so, the United States government issues more Treasury bonds to fund the deficit.

Concurrently, the added supply of Treasury bonds reduces their value. Also, it leads to a declination in the value of similar bonds (i.e. mortgage-backed securities). In conclusion, a decline in mortgage-backed securities fuels higher mortgage rates.

Future Outlook

Looking forward, analysts and investors eagerly await additional information regarding the President Trump tax cuts. Based on the reasoning, the tax cuts hold potentially to negatively impact mortgage-backed securities.

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2022-04-02T15:28:41+00:00 February 9th, 2017|Categories: News|Tags: , |