Tariffs Shake the Markets, But When Will Rates Fall?

Wall Street has been on a rollercoaster since President Trump's April 2nd bombshell announcement implementing heavy tariffs. The S&P 500 has shed 10% of its value since mid-February, and at one point was down as much as 18%.

Real estate investors have been watching these market gyrations with particular interest, hoping the turbulence might finally trigger the interest rate relief they desperately need. Many properties purchased during the 2021-2022 boom are now underwater as owners face the daunting prospect of refinancing loans at today's elevated rates.

Yet despite the significant market correction, the Federal Reserve is standing firm with rates at 4.25%-4.50%, and mortgage rates remain stubbornly high at 6.8%. This leaves many in the real estate sector asking: Why aren't rates falling despite the market turmoil? Let's examine some possible factors keeping rates elevated in these uncertain times.

Tariff Policies Raise Inflation Expectations: President Trump's aggressive tariff announcements, including a 145% tariff on China and reciprocal duties on other countries, have disrupted global trade and spooked markets. These tariffs raise inflation expectations by increasing the cost of goods, pushing investors to demand higher yields to offset anticipated price increases. Higher inflation erodes the real return on bonds, so investors require higher yields as compensation. The uncertainty around Trump's 90-day tariff pause (excluding China) has failed to fully calm markets, keeping yields elevated.

Foreign Holders Selling Treasuries in Retaliation: Trump's aggressive tariffs, including 145% on China and reciprocal duties on others, have strained relations with key trading partners. Countries like China and Japan, facing economic pressure from disrupted trade, may be selling Treasuries to signal discontent. For instance, China's holdings have reportedly dropped to their lowest level since 2009, though exact figures vary.

Economic Pressures Abroad Drive the Need For Liquidity: Japan and European nations face their own economic challenges, including slow growth and inflation. Selling Treasuries provides liquidity to stabilize domestic markets or fund stimulus. For example, Japan’s need to support the yen amid trade disruptions may drive Treasury sales.

Hedge Fund Deleveraging: Hedge funds unwinding leveraged "basis trades" (betting on price convergence between Treasuries and futures) have exacerbated the bond sell-off. These funds, facing margin calls or losses from tariff-induced volatility, are liquidating Treasury holdings, driving prices down and yields up.

It’s difficult to determine exactly what is causing rates to remain stubbornly high. The good news is that history suggests this period of high rates amid market volatility won't last indefinitely.

If stock market uncertainty persists, we anticipate a gradual flight to safety that should increase demand for Treasury securities, ultimately driving yields down and bringing relief to borrowers. Though the immediate landscape remains difficult, market fundamentals typically favor lower rates during extended periods of equity market turbulence—potentially creating a more favorable refinancing environment in the coming quarters.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.