Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month for his commentary.
The 10-year Treasury yield is more important to CRE than whatever the level of the federal funds rate may be. That’s why the recent direction of this benchmark’s yield is making many investors nervous. The Fed dropped fed funds rates in both November and December, and the 10-year Treasury did a zoom maneuver! What’s with that?
Reflation risks are becoming more evident, with recent data pointing to “sticky” inflationary pressures in key areas of the economy, particularly the bellwether services sector. Recent economic news fueled that concern via the strength in the December ISM services price index, marking the highest reading since January 2024. Additionally, the monthly headline CPI rose to its highest level since last March.
While off its 8-month peak of 4.89%, the U.S. 10-year Treasury yield has remained elevated in response to these signals. Meanwhile, the policy-sensitive U.S. 2-year yield has risen to 4.38%, the highest level since late July. As a result, the yield is trading in line with the current Fed funds target rate at 4.25% to 4.50%.
Enter Trump 2.0 … pro-growth, reduced domestic taxes, increased foreign taxes (tariffs), employment pressures (illegals deported), reduced Government spending (This will take time.), etc. The result in financial and investment markets: volatility, and yes … opportunity. PwC’s recent Annual Global CEO Survey reveals an optimistic outlook among decision-makers, with nearly 60% expecting economic growth to improve over the next 12 months. This optimism persists in spite of persistent concerns about macroeconomic volatility and inflation, which remain the top risks anticipated for the year ahead.
CRE equity investors – all classes – are liquid. Lenders are less so. A resurgence of higher bond yields (reduced bond value) is pressuring bank regulatory compliance levels – again. End-of-year figures show over $900B of CRE debt coming due in ’25. An estimated 30% of this is anticipated to be extended to ’26. About 30% of CRE debt is held by banks.
Renewed inflation concerns complicate the Federal Reserve’s path forward, especially with market expectations for additional interest rate cuts clashing with continuing inflationary pressures.
Notably, the Fed cut the fed funds rate by ¼ point at both the last November and December FOMC meetings. Growing concerns that sticky inflation will persist, perhaps leading to a period of reflation, along with new fiscal policy uncertainty of Trump’s administration, are motivating factors for future Fed behavior.
The near-term outlook for inflation and monetary policy remains uncertain, leaving room for discussion about whether current Fed strategies are sufficient to address potential pricing pressures. Accordingly, interest rate cuts are unlikely in the near future, and rate increases may even become a topic of discussion. In this environment, the Fed is likely to proceed cautiously, responding to evolving data on inflation, employment, and economic growth. Meanwhile, the Treasury market has raised its risk premium to mitigate potential repercussions if the Federal Reserve has prematurely reduced interest rates in recent months.
Many investors will erroneously continue watching the Fed as their indicator for CRE market interest rate movements and market opportunities. We humbly suggest you keep an eye on the U.S. Treasury market instead. That market more accurately digests all of the uncertainties noted above, and forecasts its findings in price behavior.
If you need a hand sorting all of this out, give us a call to discuss your opportunities and circumstances.