Whaddya Think Rates Are Gonna Do?

COSTA MESA, CA-It's a commonly asked question in our business.  It's a natural one considering the cost of capital matters…a lot; especially in commercial real estate. Yogi Berra, baseball great and master at turning a phrase, perfectly articulated my feelings when he said, “I wish I had an answer to that because I'm tired of answering that question.” What an apropos insight, particularly in regards to the direction of interest rates! Think about it: we have access to a virtually limitless supply of opinions about interest rates.

Perspectives come from billionaire investors, the Blue Chip consensus, money center banks, and the Congressional Budget Office just to name a few. That's a lot of brainpower, and a lot of financial responsibility, trying to put forth a good answer.  Nevertheless, the question is still asked. 

As I tried to develop an insightful answer to the question of rates, the advice of another baseball icon, Casey Stengel, came to mind: “Never make predictions, especially about the future.” How can you argue with a man dubbed “The Old Perfessor”? Besides, there's a lot more perceived value in the crystal ball of George Soros, RBS, Bill Gross, or Wells Fargo than in mine.  Considering the comparative limitations on the value I can deliver, regardless of whether my answer is Mensa material…or not…I decided not to share personal predictions.

Instead, I chose to research and synthesize the perspectives of those big brains with big financial backing. There is value in knowing what the big organizations predict and what the investing phenoms anticipate. Well, in late January on CNBC, billionaire Soros, opined that interest rates would increase dramatically, a big leap, when there are clear signs the US economy is picking up. 

Meanwhile, in early January, Wells Fargo forecasted that 10-year Treasury yields would increase 10 basis points each quarter through 2Q14, then by 20 bps the next two quarters. About the same time, RBS Securities shared that Fed operations, even in a rosy economic scenario, would keep Treasury yields in the 1.9% range at year end. Uh oh…the Old Perfessor's words may haunt someone.

Let's face it, a big leap in the Treasury yield, gradual increases in yield, and no change in yield by year-end are mutually exclusive events. Knowing what these experts predict can lead to interesting conversation. But, their opinions suggest three different paths—a proverbial fork in the road.  Are rates are going up quickly, going up slowly, or not going up at all? 

Struggling for guidance I turned back to Yogi Berra. There it was, another quote, appearing radiantly before me, “If you come to a fork in the road, take it.” Finally, the answer--share the synthesized research when asked the inevitable question. Then, turn to a discussion about rates today. Isn't the real fork in the road about action versus delay? Should I act today because interest rates are attractive, or wait for a better tomorrow? Waiting to act is risky—maybe you'll win, but maybe you'll lose. What we do know today is that 10-year fixed rates are in the high 3's to low 4's depending on leverage. We know that the supply of capital is growing and that life companies, CMBS firms, banks and others are competing for your business. Nobody really knows what rates are 'gonna do', but I do know that now is a pretty good time to “take the fork” and get new financing.

Tom Shelock is the co-founding principal of Talonvest Capital Inc. in the Orange County, CA office. He can be reached at tsherlock@talonvest.com. The views expressed in this column are the author's own.

Readers, what are your thoughts? Are rates are going up quickly, going up slowly, or not going up at all? Please respond in the comment area below.