24 Hour Local Real Estate News

The Forces Shaping Treasury Yields This Year

The US economy is showing signs of reinvigorated growth built on rising consumer sentiment, small business optimism and momentum in other areas. December job creation beat expectations with 256,000 new positions, following 212,000 jobs added in November, according to John Chang, national director of research and advisory services at Marcus & Millichap. In addition, holiday retail sales grew by about 3.8% year-over-year, beating expectations.

“It looks like the green shoots of growth have begun to grow,” Chang said in a recent research video.

However, Chang said those growth factors combined with potential policy changes run the risk of reigniting inflation. This has put upward pressure on interest rates since the beginning of the year and an increase of close to 20 basis points on the 10-year Treasury to 4.8%.

“If we see meaningful upward movement in the consumer price index or the personal consumption expenditure readings, we'll likely see the 10-year move higher,” said Chang.

Inflation precursors to monitor include job openings, falling unemployment and outsized job additions. Other metrics include retail sales and the Institute of Supply Chain Management indexes for manufacturing and non-manufacturing.

Chang said campaign trail public policy plans like increased tariffs, reduced taxes, increased immigration controls, and deregulation could also put upward pressure on inflation.

Meanwhile, downward pressure on Treasury rates could result from increased unemployment or falling job creation that could cause the Fed to cut rates. Stalling retail sales or substantive drops in the ISM indexes could signal an economic slowdown that could put downward pressure on the 10-year Treasury. And a flight to safety from the stock market to bonds also could push it lower, he said.

“From a commercial real estate investment standpoint, we already have a pricing expectation gap between buyers and sellers, and in many cases, the cost to borrow money for real estate purchases is higher than the yield and investors generally don't like going into an investment with negative leverage,” said Chang. “That can continue to put upward pressure on cap rates, further reducing property values.”

He noted many of these are short-term obstacles and fundamentally, the supply-demand outlook for most types of commercial real estate remains positive with demand strengthening and the pace of supply addition slowing.

“While the short term math has the hurdles of negative leverage over the long term, the supply and demand balance looks really positive for most property types,” said Chang. “New supply will not keep up with demand over the long term. Interest rates may prove to be bumpy in 2025 and if rates drop, investors could refinance at a lower rate, but they'll still have the upside potential of the long-term supply and demand imbalance.”

Reprinted with permission from the Monday, 27 January 2025 07:03:02 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.