China could technically crash the US housing market – but whether it could afford to do so is another question
A sharp uptick in Treasury yields as the US and China lurched deeper into a trade war last month stirred fears that China was dumping its US government debt – potentially roiling the bond market and sending mortgage rates shooting higher.
But while the superpowers struck a truce on tariffs this week, announcing a 90-day reduction of massive levies on each other’s imports, a China-led crash of America’s mortgage market looks unlikely even if hostilities resume.
About $760 billion worth of holdings in US Treasury securities lie in China’s hands, including mortgage-backed securities, and a mass selloff would probably spike Treasury yields and by extension US mortgage rates.
That would be an undoubted blow to the US economy. But it would also likely drive up the yuan – making Chinese exports more expensive to global buyers – as well as devaluing China’s remaining US Treasuries, sowing global financial chaos, and undermining China’s financial credibility to other countries and investors.
China may not be willing to take that risk, but it certainly represents a significant bargaining chip in negotiations expected to commence in the weeks ahead, according to William Raveis Mortgage regional vice president Melissa Cohn pictured top).
She told Mortgage Professional America the April jump in Treasury yields offered a glimpse into China’s ability to directly influence the US mortgage market, even if it seemed unlikely to accelerate a selloff.
“It seems that China has figured out that it’s probably not in their best interest to crash our market,” Cohn said. “But the funny thing is that President Trump keeps saying that the US holds the upper hand. That’s not really true.
“China holds the upper hand because they own 15% of our Treasury debt, and we saw that with that skirmish [in April] where China was selling all the debt and they were just crashing our markets. So they hold the upper hand. We don’t.”
Temporary tariff truce unlikely to significantly ease economic fears
The outlook for mortgage rates after the tariff pause announced Monday in Geneva remains unclear. 10-year Treasury yields climbed following the news as traders pared back expectations for Federal Reserve interest rate cuts this year, suggesting the central bank is unlikely to act soon to ease tensions in the economy.
But while yields slid briefly after data showed US inflation came in lower than anticipated for April, they jumped again as financial markets braced for a tariff impact on the economy that still hasn’t shown itself.
Traders pared back expectations for Federal Reserve rate cuts after the US and China agreed a 90-day pause on tariffs – but Fed officials still sounded downbeat on the economic outlook despite the deal.https://t.co/TY66LD5eCi
— Mortgage Professional America Magazine (@MPAMagazineUS) May 13, 2025
Tariffs are still in place between the world’s two largest economies. The US has lowered its maximum levy rate on Chinese imports to 30%, down from 145%, while China’s countermeasures on the US have been trimmed from 125% to 10%.
That’s a temporary arrangement – and Fed officials have still sounded a downbeat tone on the economic outlook in spite of Monday’s truce.
Vice chair Philip Jefferson reiterated Wednesday that a prolonged tariff war would pose upside inflationary risks and likely weigh against economic growth.
“If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation,” he said in prepared remarks for a New York conference.
Chinese economy still strongly tied to US dollar despite recent pivot
China has moved to reduce its dollar dependency in recent times, with about 55% of the country’s official currency reserves made up of dollar-denominated assets at the end of 2019, according to its State Administration of Foreign Exchange (SAFE).
That’s a big decline from the 2005 peak of 79% and lower than 2019’s global average of 61%, signaling a clear strategy to reduce exposure to the greenback. But the potential damage to the Chinese economy from a mass Treasury selloff would still be huge – and Investment Company Institute (ICI) chief economist Shelly Antoniewicz told MPA this week that it remains an unlikely move.
“Could China make a significant move in the US debt market? Certainly, but the more pertinent question is whether the likelihood of such an action is meaningfully greater than zero, or still quite remote,” she said.
“While the possibility exists, there are several strategic risks that could dissuade China from acting too aggressively.”
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