Trumpian Wave Threatens Key Markets

February 20, 2025 | Premium Service | In this edition of The Institutional Risk Analyst, we take an initial look at asset allocation in the Trumpian Age. As with his historical analog, President Andrew Jackson (1828-1836), President Donald Trump is a disruptor of all around him, often for the good. Yet the mere fact of change in many sectors of the US economy will create both problems and equally impressive opportunities.  What are some of the market sectors that will be most disrupted by the Trumpian Wave of 2025?

As we have been describing over the past several years (“Biden Administration Staggers Toward a Debt Default”), President Trump is requiring all federal agencies to "report up" to the White House. This week the Trump Administration published a new executive order that replaces and expands on Executive Order 12866.

The new EO, "Ensuring Accountability for All Agencies," greatly expands the reach of the White House, OMB and GSA in the activities of the independent agencies. In short, the independent agencies are no longer independent of the Executive Branch. Federal Reserve Chairman Jerome Powell now reports up to National Economic Council head Kevin Hassett and Treasury Secretary Scott Bessent.

Given this latest development from the White House, we think that businesses should recalibrate expectations for the level of friction from federal regulators when it comes to business plans going forward. As we get clarity on new Fed, Federal Housing Administration and Ginnie Mae leadership, we think there will be opportunities to push back or eliminate areas of friction such as Basel III, risk-based capital rules at GNMA, the use of two credit scores and bi-merge in conventional lending, and a punitive view of prepayments at the FHA.

Likewise, the Consumer Financial Protection Agency has been lobotomized and will operate solely to undo years of excessive consumer regulations. We are in the age of magical thinking in Washington. Anything is possible if the financial services industry can but just manage to ask. But what does this mean for investors? It means massive disruption in key markets like multifamily real estate and Treasury debt. Hello.

Multifamily Real Estate

The cuts announced by the Trump Administration at HUD this week were reported to be primarily focused on personnel engaged in financing for multifamily housing. The total dollar amount of HUD multi-family loan guarantee commitment authority is currently set at $400 billion. The GSEs each have a cap of $100 billion annually for new multifamily loans, but have far larger portfolios.

Together with the GSEs, HUD provides significant support to the multifamily sector and at far higher loan-to-value rates than are available from private lenders. Conservatives have long wanted to force the GSEs and HUD out of financing for multifamily, which will result in some serious credit problems in red and blue cities around the country. 

You could almost -- almost -- argue that the banks and private developers want to create a crisis in urban multifamily to generate some restructuring opportunities. The only trouble with this predator thesis, however, is that many of the assets financed by HUD and the GSEs are smaller properties that cannot be financed privately. Outside of federally-supported lending, small multifamily is a hard money, cash market, which further compresses valuations. The charts below come from the most recent earnings presentation for Freddie Mac and Fannie Mae. 

Freddie Mac (12/31/2024)

Fannie Mae (12/31/2024)

A reduction or withdrawal of HUD/GSE cover for multifamily assets is going to create a big mess, both for investors and banks alike. Residents in these assets will likely be facing significant problems longer term. Bank multifamily is about $600 billion in unpaid principal balance (UPB), while non-bank multifamily loans – including the GSEs – is another $1.6 trillion in UPB, for a grand total of $2.12 trillion (MBA). As you can see in the chart below, the GSEs are about half of the total market in multifamily. 

Source: MBA, FDIC, FHFA

Then, when the Trump FDIC gets around to disposing of the rest of the rent stabilized assets from the estate of Signature Bank, the market for low end rent-stabilized multifamily assets could be even more adversely impacted. Once FDIC appoints a new head of resolutions and recoveries, and seats a new board, the sale of the Signature Bank assets is at the top of the agenda. Again, the financing market for rent-stabilized properties in New York is very limited.

Now conservatives in Washington may think that reducing federal support for multifamily housing is a great idea, but the reduction in credit support for these assets will create some very serious political problems over the medium term. As the GSEs withdraw from these low-income markets, for example, many of these assets will find it difficult to secure new financing and will go into default.

Blue state governors like Kathy Hochul in New York will face some very big political and financial problems. And maybe that is the intention. But any hope of releasing the GSEs from conservatorship also will be hurt because of the reduction in profitable revenue for Fannie Mae and Freddie Mac. In addition to forcing the GSEs out of multifamily lending, conservatives around the Trump Administration want to force the GSEs out of financing second homes and second lien mortgages -- two very profitable areas for the GSEs.

Treasury Debt

During his Senate confirmation hearing, Treasury Secretary Bessent said that he wanted to increase the amount of long-term debt issued by the Treasury. As we’ve noted in previous comments, under the Biden Administration the Treasury focused most of its issuance on short-duration T-bills to keep the deficit from growing too rapidly, but the Fed’s rate hikes since 2021 have largely thwarted this effort.

Now Bessent is singing a different tune, namely that any move to boost the share of longer-term Treasuries in government debt issuance is some ways off, given current hurdles that include the Federal Reserve’s quantitative tightening program, where the central bank is effectively selling Treasury exposure into the markets.

“That’s a long way off,” Bessent said in an interview with Bloomberg Television’s Bloomberg Surveillance on Thursday, when asked about terming out Treasuries sales.

Why is this important? The trade policies and tariffs threatened by the Trump Administration are adding uncertainty to the credit markets, which in turn is hurting demand for Treasury debt. Likewise, gold is paring recent gains after Bessent said that revaluing the US’s reserves of the metal were “not what he had in mind” when he discussed monetizing the assets on the US’s balance sheet.

As President Trump has turned up the rhetoric and also the reality regarding tariffs, this change in US policy has encouraged many nations to look at diversifying reserve assets away from the dollar.

"Japan has seen the largest drop in its Treasury holdings since 2022, only beaten by China as it strives to diversify away from the dollar," notes Simon White of Bloomberg. "Regardless of the reason, the biggest customer for US savings is currently taking a back seat."

White notes that global investors are holding less US debt. Even though purchases by the rest of the world as a whole (as of the latest data in 3Q24) have picked up in dollar terms, foreigners now hold less than a third of US public debt, down from 50% a decade ago. Even as yields on US debt have risen, buyers have reduced purchases because of unrealized losses related to higher interest rates.

The same market risk that has driven huge mark-to-market losses for US banks as interest rates have risen is also hurting key foreign buyers of Treasury debt. Norinchukin Bank widened its loss forecast to ¥1.9 trillion and named a new chief executive officer as the Japanese lender tries to recover from its foreign bond investment debacle. Other large buyers of Treasury debt around the world face similar challenges.

Many of the policy changes being put in place by the Trump Administration have both immediate and long-term implications that have yet to be fully assessed by the financial markets. With Treasury primary dealer inventories at high levels, the Street is long risk and facing a softening market for Treasury debt.

As the Trump Administration accelerates its attack on the Administrative State, it will be interesting to see how the dollar performs vs gold. In particular, if the dollar starts to lose ground vs other currencies, then we may see upward pressure on US interest rates as foreign buyers curtail new purchases. It's as though Donald Trump has wound the economic clock back 50 years to President Richard Nixon and the early 1970s, when the US shut the gold window for foreign central banks. Stay tuned.

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