Could A Drop In Chinese Interest Rates Spark A Bond Rally In The U.S.?


Prices of single-family homes and rental costs continue to rise in the United States. But officials in China have been lowering interest rates and over the last few months, the Asian county has seen a drop in property price tags as well.

Here in the U.S., many companies—including Bloomberg—are reacting by predicting a possible rally in 2022. Especially in the bond market.

Bond prices have an inverse relationship with mortgage interest rates. As bond prices go up, mortgage interest rates go down and vice versa, according to an article on Rocket Mortgage’s website.

“These sorts of events cause uncertainty,” said Elizabeth Rose of Mortgage 300 in Dallas, Texas. “Their (China) money is going to seek a better return, so we’ll potentially have more buying in the bond market. But, even if that does not occur, just the uncertainty will drive U.S. money into the bond market, because it is considered a safe haven. If we see other countries in Asia and Europe begin to follow suit, and also begin lowering interest rates over a greater period of time, then we could see the trend having a greater impact on the U.S.”

Rose said the market is not greatly affected by China but is greatly directed by fear.

“Whenever we get bad news, it is good for interest rates. When we see uncertainty, we see fear. Even with the Omicron variant, people fear that. That uncertainty plays into our rates department. Then when we see things improve, we’ll see money flow out of the bond market and back into the stock market,” said Rose. “A trend we have seen for about two years now in the capital market is the health care scare has become one of the drivers of the market, where that has not been the case for a long while.”

Rose added inflation is the biggest driver of market interest rates. 

“New events such as China or a new COVID variant are short term, inflation is far more steady. As inflation rises, interest rates rise,” says Rose. “There are some economists who feel that interest rates could go down. That has far more to do with how the feds combat inflation, if that works then rates will go down. But we could be looking at February or March before we know that.”

Gordon Miller is CEO of Miller Lending in suburban Raleigh, North Carolina. He said in an interview with The Mortgage Note that he does not think China will have much of an impact at all in the United States.

“I don’t see any correlation with China cutting rates any more than raising the rates,” Miller said. “I don’t see that as anything swaying our mortgage markets for 2022. I think that will be much more dependent on the virus and the economy’s reaction to that in the first half of 2022.”

Miller is looking on the brighter side of interest rates, as far as buying and the mortgage market are concerned.

“We’ll see if indeed inflation is transitory and if the Fed will indeed… raise interest rates,” Miller said. “Personally, I do not think it will actually raise rates next year.”