Mortgage interest rates are tied to interest rates on U.S. Treasury bonds. If demand for bonds is high, interest rates are low. If demand is low, the government must pay higher interest rates to bond investors to entice them to keep buying. So if China, the world’s biggest foreign investor in U.S. bonds, quits buying, bond interest rates will rise, driving up mortgage interest rates as well.

Treasury bonds are the debt that the U.S. government sells to pay for items in the national budget that aren’t covered by tax revenues. The bigger the deficit for the year, the more Treasury bonds the U.S. must sell. The current economy has created huge U.S. budget deficits, making it even more important that demand stays high for bonds.

Awkward Situation for Treasury Secretary Tim Geithner

In June 2009, U.S. Treasury Secretary Tim Geithner addressed a group of students at Peking University and stated that Chinese investment in U.S. Treasury bonds was "very safe." His remarks were met with a round of laughter from the crowd.

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