Kirisits’ Corner by Matt Kirisits
Volatility Returns as Treasury Rates Decline
For most of October and November, stock market indices charged relentlessly higher and continued to make all-time highs. The 10 yr T gradually increased to a recent high of 1.68% reflecting optimism about continued strong economic growth. Properties continued to trade at record low cap rates and CRE capital markets were highly liquid with very competitive rates. Yet, beneath the surface, there were concerns about persistent 5%+ inflation, record-high valuations of growth stocks, changes in Fed policies, and US-China tensions.
As is often the case with financial markets, things changed gradually and then all at once. The tipping point was the post-Thanksgiving media coverage of the Omicron COVID variant. Since then, the VIX index has climbed to 30 (reflecting stock market volatility) while the 10 year Treasury rate dropped by 20 basis points overnight. The S&P 500 is moving up or down by 1% nearly every day and cryptocurrencies are demonstrating a high correlation to stocks. Fed Chairman Powell announced that the central bank would stop describing inflation as transitory, confirming what many market participants have been saying for months. A number of tech stocks have seen 50%+ drawdowns from their peak.
Fortunately, market volatility has had little effect on commercial real estate so far. Although some lenders are widening their spreads, the simultaneous drop in Treasury rates means that all-in rates are almost unchanged. However, given the Fed’s announcement that it will taper its bond-buying program, the stage is set for a gradual rise in interest rates. A key factor will be the pace of rate hikes and whether the dot plot is adjusted in the coming months. As the Fed ends its support for long-term Treasuries, yields will be more market-determined rather than Fed-determined.

Source: Google Finance
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