BofA: 30-Year Mortgage Rate May Hit 5% Next Year

Rising Interest in Government-Backed Mortgage Bonds

Investors are showing growing interest in the possibility that the Trump administration might push the Federal Reserve to purchase government-backed mortgage bonds again. This idea has coincided with a recent surge in the roughly $10 trillion market for these bonds on Wall Street, along with optimism about the potential for a 5% 30-year fixed-rate mortgage in the coming year.

The drop in the benchmark 10-year Treasury yield to around 4.03% has played a role in this trend. Additionally, the “current coupon” mortgage-bond spread has narrowed to approximately 120 basis points as of Monday, down from around 145 basis points in early September. Most U.S. mortgage loans are priced based on the 10-year Treasury rate plus a spread, which compensates bond investors for the risks involved in the housing market. When both the Treasury rate and the spread decrease, borrowing costs in the housing market typically follow suit.

A team of BofA Global strategists, led by Chris Flanagan, suggested in a Monday client note that the rally reflects an increased probability that the Fed may engage in MBS QE—short for agency mortgage-backed securities quantitative easing. They noted that the Trump administration’s consideration of declaring a housing emergency supports this view. The administration might also aim to lower the 30-year mortgage rate from its current level of around 6.35% to about 5% before the 2026 midterm elections. However, they emphasized that greater control of the Fed by the Trump administration would likely be necessary to implement such policies.

Almost 30% of U.S. mortgages currently have a rate of 5% or higher, according to Realtor.com. Lowering the 30-year mortgage rate to that level could spark a refinancing boom. In early September, Treasury Secretary Scott Bessent mentioned that "everything was on the table" regarding strategies the White House might use if a national housing emergency is declared. However, the Treasury did not respond to requests for comment for this article.

Challenges in Convincing the Fed

Despite the growing interest, convincing the Fed to use its balance sheet to address high mortgage rates remains a long shot. Chair Jerome Powell has expressed a goal of achieving a Treasury-only balance sheet, and his term does not end until mid-2026. Nick Travaglino, a portfolio manager and head of securitized credit at Nuveen, believes this scenario is unlikely. He pointed out that it took millions of layoffs during the onset of the COVID pandemic to prompt the most recent Fed bond buying, and a global financial crisis before that.

Using the Fed to lower mortgage rates without increasing housing supply could lead to rising home prices, making housing equally unaffordable in the future. However, Travaglino acknowledged that the Trump administration has been unpredictable and that this possibility should not be ignored.

Alternative Approaches to Housing Affordability

With the housing market struggling, investors are exploring their own ideas to tackle affordability issues. A proposal from Citrini Research suggests lifting existing caps at Freddie Mac and Fannie Mae as part of the Trump administration’s privatization efforts, allowing them to purchase more of the mortgage securities they help create.

Travaglino at Nuveen proposed a more targeted approach, suggesting adjustments to guarantee fees at Ginnie Mae for first-time homeowners to make those mortgages more affordable. Another factor contributing to the rally in government-backed mortgage bonds has been Trump’s “liberation day” tariffs in April, which prompted investors to seek safety and explore strategies like mortgages.