Lower 10-Year Treasury Rate Reduces Debt Cost, but Buyer/Seller Perception Gap Still Prevalent

 

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Research Brief
June 2017
FEDERAL RESERVE
Developing Trends
Long-term interest rates trend lower. Following the 75 basis point surge in the 10-year Treasury immediately after the election, long-term rates have steadily declined. Consistent international demand for the security of U.S. Treasurys has held rates in the low-2 percent range, a positive for commercial real estate investors. Although the cost of capital has fallen in recent months, an expectation gap between buyers and sellers continues to restrain activity.
Debt capital broadly available. Loan officers have tightened their lending criteria, particularly development capital and multifamily investment loans. However, market liquidity remains elevated with loans for well-qualified investors available from a wide range of sources.
Fed may face a quandary. The Federal Reserve stated plans to raise rates once more this year and three times in 2018, but lower long-term interest rates could limit the Fed’s options. The Fed does not want short-term yields to surpass long-term rates, resulting in an inverted yield curve, a historical signal of a looming recession. The spread between short- and long-term rates stand at 80 basis points, the lowest level since 2007.
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Lower 10-Year Treasury Rate Reduces Debt Cost, but Buyer/Seller Perception Gap Still Prevalent
Fed move points to economic strength. A broad range of economic drivers including steady hiring, rising wages and retail sales growth have reiterated economic momentum, prompting the Federal Reserve to raise its benchmark rate by 25 basis points. The Fed is closely monitoring the low 4.3 percent unemployment rate that could spark inflation, prompting it to tighten monetary policy. Fed signals liquidity tightening. Through the recession, the Fed used Quantitative Easing to boost market liquidity and economic growth. This process increased the Fed’s balance sheet from $1 trillion to $4.5 trillion, the highest level recorded. The Fed will now begin to unwind this process, which could lessen demand in the bond market and apply upward pressure to long-term Treasury rates.
4.3% Unemployment Rate** 1.0 -1.25% Fed Funds Rate
* Through June
** Through May
Sources: Marcus & Millichap Research Services; BLS; Federal Reserve;
U.S. Census Bureau
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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
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