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Long Term Treasury Yields Stay the Course In the Wake of Market Volatility

We saw market volatility in the wake of last Wednesday’s Fed Meeting. Markets were reacting to the perceived hawkishness of the Fed as possible rate hikes in 2023 or even 2022 were being discussed (note that previously the Fed had insisted the first rate hike would be in 2024). The Dow plunged last Thursday/Friday, before rallying on Monday morning. Yet, the 10 year treasury yield actually dropped during the week (no sell off), unlike the infamous 2014 “Taper Tantrum”. Why? First off, there was a sell off in short term treasuries (from 30 days to 2 years) with those yields rising, while long term yields (5 to 30 years) lowered. Markets sold off on the short term because those treasuries are more sensitive to Fed rate increases as the Fed Funds Rate is an overnight rate. Long term rates dropped as markets were anticipating a scenario whereby the Fed rate increase hampers economic growth (10-30 year treasury yields often fluctuate with growth expectations). The yield curve thereby flattened. Fed Chair Powell continued to assuage market fears this week in his congressional testimony. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation”. Today the 10 year closed at 1.49% down from last Wednesday’s 1.56%.


Spotlight on Washington DC, news for commercial real estate: The Supreme Court ruled 7-2 today that the head of the FHFA can be replaced by the President without “cause”. President Biden is expected to name a replacement for Mark Calabria, the existing head of the FHFA. How does this affect commercial real estate? The FHFA has been the conservator of Fannie Mae and Freddie Mac since 2009. The FHFA was put in charge of the agencies in the wake of the Great Recession and the housing market crash. Since then the FHFA has instituted annual caps on multifamily loan originations by Fannie/Freddie. The caps for 2021 are $70 billion for each agency. Note that the agencies originate about 50% of total apartment permanent loan volume. Today’s news is significant as Calabria was a proponent of privatizing the agencies. That would remove the famous “implied Federal Government guaranty” for Fannie and Freddie bonds. That would result in an uncertain future for the agencies as the private sector may not actively trade Fannie and Freddie’s bonds at the spreads we see today. This would possibly increase borrowing costs for apartment owners. Fannie and Freddie apartment loan rates impact values and cap rates nationwide and interest rates amongst private lenders (banks, life companies, funds, etc). Calabria’s replacement is expected to continue the Federal Government’s involvement in the agencies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners