Life Insurance CRE Mortgage Returns on Track for Historical Lows
This could be the worst performance since 1996 when Trepp first started collecting the data.
“Historical” tends to mean either really good or really bad. When it comes to life insurance CRE mortgage total returns, let’s just say good isn’t the word of the moment, according to Trepp’s Q3 2022 LifeComps Report.
The LifeComps Commercial Mortgage Loan Index is a benchmark “based on actual mortgage loan cash flow and performance data which has been collected quarterly from participating life insurance companies since 1996.”
Currently, the index year-to-date return is -11.84%.
“In the more than two decade history of the LifeComps portfolio, the largest negative annual total return was 4.14% in 2008,” the firm wrote. “Unless there are some significant developments in the market in the last month or so, 2022 seems inevitable to become the worst-performing year in LifeComps history.”
Since the fourth quarter of 2021, the loan count has been falling.by almost 1.6%. The balance has stayed relatively steady, but the value has fallen by 13.5%.
Trepp sees rising rates of Treasurys as the reason for the slide. The 10-year Treasury yield was 2.98% at the end of Q2 but hit 3.83% by the end of Q3. The 5-year went from 3.01% to 4.06%. The Federal Reserve has been pushing a series of large jumps in interest rates to combat inflation.
But things are looking up, as Trepp sees it. “Despite the continued negative return, there are signs that the market will persevere in the near future,” the release quoted Benqing Shen, Director of Product Management at Trepp, as saying. “November CPI data presented a lower-than-expected inflation print and the treasury market reacted by staging a rally. The 5-year treasury dropped from a high of 4.39 to 3.83 as of November 17. There are expectations of a ‘Fed pivot’ on the horizon.”
Then again, it may be a matter of timing and when the report was written. Although November’s labor numbers came in higher than expected, and as the Fed has clearly communicated, they are a significant indicator to the agency. That shift had some Fed watchers wondering whether the expected benchmark interest rate hike would be a lowered 50 basis points, or if the Federal Open Market Committee might take the jobs information as bad news and authorize another 75-basis point hike. Then again, the 5-year yield as of December 6 was 3.73, which would be even lower.