Treasuries Yields Remain “Lower than they should be”

JP Morgan Chairman Jamie Dimon’s comments on the 10 year Treasury last Friday were widely reported: “I think rates should be 4 percent today,” Dimon said. “You better be prepared to deal with rates 5 percent or higher.” On the same day however, the July jobs report, while showing strong fundamentals, indicated that wage inflation remains relatively flat (monthly growth of 7 cents per hour). Also, the Fed’s preferred inflation gauge (PCE) has slipped below their 2.0% target rate. But other macro economic conditions such as economic growth, record deficits, Fed balance sheet reduction all bolster Mr. Dimon’s statements. What would that do to commercial real estate? Are investors ready for 10 year fixed rate loans at 6-7%? General economic theory would suggest that interest rate increases occur in an inflationary environment where lease rates are also increasing. This should boost property income and hopefully compensate owners for the increased cost of capital. Also, transaction volume would tail off as property sellers won’t increase cap rates (my informal survey of sales brokers indicated that sellers usually take 9-12 months (or longer) to adjust cap rates. Refinance metrics will become tighter, maybe some borrowers will need mezzanine or preferred equity financing in order to get to their target loan proceeds. But for those “living for today”, there’s good news as a record issuance of 10 year treasury bonds ($38 billion) was well received by the market with the yield coming in at 2.97%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners