The bond market is experiencing its “worst” January/February performance in years. The 10 year Treasury yield started 2021 at 0.91% and hit 1.30% this week and is now at 1.28%. The next critical level would be at about 1.50-1.60%. That was the last “normal” level before the March pandemic market disruption. Of course we are not “back to normal” yet. But lower levels of new Covid cases and hospitalizations combined with vaccine distribution is cause for optimism (nearly 20% of the US adult population has received at least one dose). Bond markets are historically “forward looking” as buyers are anticipating economic conditions down the road. The recovery is expected to unleash pent up demand for goods and services. Goldman Sachs increased their US GDP forecasts for 2021 and 2022 to 6.8% and 4.5% respectively, an increase of 0.2%. This week saw spikes in oil (hitting $60 per barrel, a pandemic high) and industrial metals led by copper and tin (now at multiyear highs).
The case against inflation: slack in the labor market stubbornly holding down wage inflation. Increasing wages is a major focus and goal of the Fed. Today’s minutes from the January Fed meeting indicate the Fed sees the economy as “far from” their goals. The minutes specifically target a “broad” labor market recovery and inflation of at least 2%. Neither of these goals will be accomplished in the near future. Until then, the zero percent interest rates and $120 billion of bond buying will continue. Goldman Sachs predicts the next rate hike by the Fed in the second half of 2024 and the Fed will start tapering asset purchases in early 2022.
Focus on Self Storage: The CMBS rally continues with originators still quoting in the 2.80-3.25% range even with the uptick in Treasuries. The composition of recent pools shows a strong appetite for loans on self storage facilities, a strong performer during Covid. This appetite has spread throughout capital markets as bridge and construction lenders join in funding well located self storage facilities at tighter spreads. It’s a sponsor driven market as the specialty nature of the product type makes operator expertise critical. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith