FINfacts XXIV – No. 468

Treasury Secretary Bessent made headlines by calling for 150 basis points in rate cuts, with a 50 bp cut in September being appropriate. He later qualified his remarks by saying the 150 basis point cut is a final goal to hitting the “normal interest rate,” aka the “neutral rate” (r*).” That would put the “normal” Fed Funds rate at about 2.75%. Fed Governor Bowman (on the list for 2026 Fed Chair) called for three cuts this year, signaling more concern about weakening job growth and “avoiding unnecessary erosion” in employment. Fed President Bostic (Hawkish) said, “For the rest of this year, I still have one cut on my outlook,” but he also declared the next meeting to be “live,” and his one-cut scenario could become two or three. His view is data dependent. “That also is predicated on the notion that labor markets stay solid. If they weaken considerably, that balance of risks starts to look different, and the appropriate path will look different as well.” Fed President Schmid (Hawkish) wants rates to remain restrictive. Fed Governor Barkin indicates it’s “unclear” whether the Fed should prioritize controlling inflation or boosting the job market, the “dual mandate” dilemma. Fed Presidents Daly and Kashkari (Doves). A new candidate for Fed Chair has emerged: David Zervos of Jefferies is on the short list – he is calling for an immediate 50 bp cut. Zervos touts the effects of AI on the labor force and costs (less labor, cheaper goods, and services). Of course, those changes would push both ends of the dual mandate into the “cut” category. Contrast that with some Fed hawks worried about stagflation (a slowing economy and higher prices), which is the Fed’s worst-case scenario.   

“The Data” – Tuesday’s CPI release (Dovish) indicated 0.3% increase in the monthly core (annual 3.0%). It served as a relief (for now) for Fed officials and market participants worried about tariff effects on inflation. Category-wise, again, a 0.2% increase in the shelter reading accounted for much of the increases (as we all know, it’s a wonky lagging indicator). Some categories spiked (possibly due to tariffs), such as household furnishings (0.7%), while new vehicles, apparel and commodities were flat. Markets cheered the report, seeing it as feeding the momentum for a September rate cut and more cuts in October and December. Today’s PPI release (wholesale prices) jolted markets with a 0.9% monthly increase (estimates were 0.2%), the biggest increase since June 2022 (the beginning of the rate increase cycle), with core up 0.6% (the biggest since March 2022). Both CPI and PPI showed increases in service costs, which have moderated over the past year but are now rising again. The tariff effect picture is still unclear; the narrative has yet to reveal itself. Hot PPI and cool CPI could mean that companies are “eating” price increases and not passing them on to consumers, or it could mean that price increases will be passed on if corporate margins continue to get squeezed. (It could be bifurcated, with well capitalized corporations absorbing and using economies of scale to blunt the impact, while small businesses are forced to increase prices or take large losses). Again, we are in the early innings, as much of the tariffs are about two weeks old. Market reaction was not very volatile, and rate cut futures for a September cut remained above 90% (if there isn’t a cut, you will probably see a record number of dissents). The year-end futures have about 62 bps of rate cuts priced in. It’s important to note that this month was the first month BLS budget cuts affected data collection, with more cities and regions not being counted and more “imputations” being used in the calculations.

Treasuries: 2-and 5-year Treasuries rallied, with the 5-year at 3.82%. That puts 5-year loan rates in the 5% range, with some life company and agency quotes in the 5.25% range and below. What’s next? Fed Chair Powell addresses world bankers at the Jackson Hole conference next week; the PCE report follows in late August; September will see the new jobs report (probably the most watched in recent history due to BLS controversy); and another round of PPI/CPI releases before the 9/17 meeting. Stay tuned…

By David R. Pascale, Jr., Senior Director at George Smith Partners.

Many thanks to Jonathan Chassin, Managing Director at George Smith Partners, for his observations and market commentary found below.

Cautiously Optimistic 

General Market Updates

• The CBRE Q2 2025 report shows U.S. commercial real estate lending volumes rose 45% year-over-year, driven by strong activity in CMBS, life company, and alternative lending segments.
• While momentum remains positive, market participants are navigating a competitive environment, tighter spreads, and selective underwriting standards. The lending mix continues to diversify, with growth in non-agency activity and healthy investor demand supporting deal flow across asset classes.
• The acceleration is likely a result of preparation to absorb the expected $2 trillion in debt maturities from 2025 to 2027.
• It is worth noting that 37% of this debt was originated when the federal funds rate was below 25 basis points, compared to 433 basis points today. This will result in “cash in” refinances, assets being marked to market (downward), and new equity will prime original equity in rescue capital scenarios.  

CMBS Market Activity – No more ‘Sell in May and Go away’

• The CMBS market is showing strong momentum: $13B+ pipeline over next two months, speculation of no summer break.
• Strong investor demand is driving conduit spreads tighter – “steamy” price discussions on some tranches.
• CRE and CLO issuance is at $17.26B in first half of 2025 (5x last year’s total).

Treasury Rate Drop and CMBS Market Surging

• The momentum apparent in the commercial real estate debt markets is supported by a notable 20 basis-point decline in the 10-year Treasury to 4.22% over the past month; however, it has retraced the majority of that ground (now 4.29%). The 5-year saw a similar reduction of 23 basis points to 3.83% from approximately 4.10%.
• Conduit spreads have tightened to their lowest levels since February, with super-senior notes pricing at just 82 basis points over Treasuries, reflecting strong investor appetite and significant capital to be deployed.
• Competition is on the rise among lenders, especially within the CRE CLO sector (floating rate spreads are compressing).
• Freddie Mac continues to promote longer-term financing options in the 7-to 10-year range.

Lenders Market Share – Debt Funds surge as Banks pull back

• The market share distribution of non-agency lenders changed significantly, with banks experiencing a 10% loss in market share (down to 24%), while alternative lenders won 34% of market share, replacing banks as the dominant player in non-agency lending. Insurance companies ended the quarter with 23% of market share, with CMBS Conduits at 19%.

Active Sectors and Opportunities

• Datacenter Assets continue to attract historic levels of capital – Blackstone committed publicly to $25B in PA alone to develop Datacenter infrastructure.
• Self Storage: Several large portfolio transactions, but delinquency is rising in the sector
• Large-scale construction projects are restarting in NYC, LA and are continuing South Florida.
• Multifamily: Strong lending activity, particularly in build-to-rent.
• Industrial: Ongoing operational headwinds regarding leasing and oversupply; however, delinquency rates remain low.
• Retail: True power center assets seeing increased demand, as well as grocery-anchored “neighborhood“ centers. Interestingly, there have been ongoing resolutions in the enclosed regional shopping center sector as well. Ben Ashkenazy is making the rounds to deploy fresh equity. Macerich is divesting more assets.