How you might gain from Trump’s proposal to purchase mortgage-backed securities

Trump's Mortgage Bond Initiative: What It Means for Homeowners and Investors

During a recent meeting with oil industry leaders at the White House, President Trump was seen looking out the window, reflecting on the economic challenges at hand. One of the major topics was his administration's new approach to the mortgage market.

When Americans secure a new mortgage or refinance an existing one, their loans are often bundled with others and sold as bonds to investors, backed by government guarantees. These government-backed mortgage bonds are the same type the Federal Reserve purchased extensively during the pandemic. Now, President Trump has directed his team to buy up to $200 billion of these bonds in an effort to bring down mortgage rates.

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These mortgage bonds offer investors a way to earn returns from homeowners’ monthly payments. Thanks to government backing, investors are protected from losses if borrowers default or if foreclosures rise.

Although details of Trump’s plan are still emerging, the announcement has fueled optimism in the mortgage bond market, contributing to a rally that recently pushed the 30-year mortgage rate below the significant 6% threshold.

“I expected spreads to tighten by 5 to 15 basis points,” said Harley Bassman, a seasoned mortgage expert at Simplify Asset Management. “We saw about a 10 basis point move.”

When demand for mortgage bonds increases, spreads typically narrow, meaning investors accept less yield above the benchmark 10-year Treasury rate. This reduction in spreads can translate into lower mortgage rates for new borrowers.

However, for Trump’s strategy to have a lasting impact, other investors must continue buying these bonds rather than selling into the rally for quick profits.

The Role of Mortgage Bonds in Setting Rates

The $9 trillion market for “agency mortgage-backed securities” is central to U.S. home financing. Most new mortgages are based on the 10-year Treasury yield, which recently stood at 4.19%, plus a spread determined by investor appetite for these bonds. More buyers mean tighter spreads and lower mortgage rates.

Still, this approach does not address the persistent shortage of new homes built over the past decade, a key driver of the ongoing housing affordability crisis in the U.S.

“If rates drop, home prices could rise, which doesn’t necessarily improve affordability,” noted Scott Buchta, head of fixed-income strategy at Brean Capital.

Despite these challenges, Trump is leveraging the tools available to him, including the government-sponsored entities (GSEs) that play a critical role in mortgage finance.

How GSEs Shape the Mortgage Market

According to Dan Hyman of Pimco, “Congress doesn’t need to sign off for the GSEs to buy $200 billion in agency mortgages. This marks a significant change in the mortgage landscape.”

In recent years, lenders have been encouraged to issue safer, more affordable loans that meet agency standards, making them eligible for inclusion in government-backed bond deals. This allows investors to earn income from bonds, while lenders avoid holding entire mortgages on their books. However, as Fannie Mae and Freddie Mac expand their portfolios, they may need to borrow more to fund additional purchases.

Over the past five months, the GSEs have added about $60 billion in mortgage bonds to their holdings, according to Pimco. For context, the sector’s total net supply last year was $146 billion. Hyman believes this proposal could boost demand for mortgages, lower rates, improve affordability, and further tighten spreads.

Unlike private mortgage bonds that became problematic after 2006, agency bonds are seen as relatively safe, similar to U.S. Treasurys. However, both types still carry interest-rate risks, which have caused issues for investors in the past.

The largest holders of agency mortgage bonds include banks, the Federal Reserve, foreign institutions, and major investment firms like Pimco and BlackRock. Since the 2008 financial crisis, Fannie Mae and Freddie Mac have remained under government conservatorship, meaning taxpayers could be at risk if history repeats itself.

Even before Trump’s announcement, the GSEs were quietly increasing their agency bond purchases. However, they face limits on how much they can hold—currently capped at $225 billion each. Their portfolios recently reached about $128 billion apiece, so buying another $200 billion would bring them close to these caps.

The Federal Housing Finance Agency, which oversees the GSEs, has not commented on the plan.

Is This Quantitative Easing?

The Federal Reserve has previously stabilized markets during crises by buying Treasurys and agency mortgage bonds—a process called quantitative easing (QE). Trump’s directive for the government to purchase assets is similar, though on a smaller scale.

“This is definitely a form of QE,” said Buchta. “It’s an injection of capital aimed at narrowing spreads.”

This could benefit the financial health of Fannie Mae and Freddie Mac, as agency mortgage bonds delivered over 8% returns last year—the best in more than 20 years, according to BofA Global.

Bond fund investors may have noticed these gains. For example, the Simplify MBS ETF posted a one-year return of about 7.8%, while the Janus Henderson Mortgage-Backed Securities ETF returned roughly 8.7%.

Lowering mortgage rates below 6% could offer significant relief to borrowers who have had to take out loans at higher rates since 2022.

“Refinancing is a big deal for homeowners, as it can make monthly payments more manageable,” Buchta added.

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