Uncertainty Makes Borrowing Hazardous

Borrowing is going to become much less predictable as well as more expensive. The proposed and expected tapering is already causing countries to suffer depreciation of their currencies because rates in the US have risen causing other currencies to fall. That has lead to nations, especially in the BRIC countries, to sell Treasuries to be able to free up reserves to buy in their own currencies to support them. They are caught in the bind of trying to avoid inflation which would result from falling currencies, yet needing to keep the their currencies low to stimulate exports on which their economies are so dependant. The result of all of this is there are a considerable number of countries dumping US treasuries at the same time the Fed is thinking of tapering. Result is higher rates in the US. There is a related issue which is a shortage of Treasuries to trade and hedge with. This causes disruptions in good pricing clarity and volatility, and so it makes hedging by lenders that much more problematic.

Add to this, the prospect of some sort of war ranging from minor to all out war in the Mideast, and then the fiscal cliff debt ceiling battle in October, the commencement of Obamacare October 1, and a very uncertain picture on tapering due to substantive disputes at the Fed over the true unemployment numbers. Some at the Fed think the low participation rate is due mainly to demographics of the boomers, while others believe it is more due to cyclical issues of able bodied people simply dropping out of the labor force who may return when the economy does really improve. There is also lack of clarity on who is being employed. It appears that part time workers at the low end make up a substantive portion of the new hires and that a combination of Obamacare and lack of clarity about the economy is causing a substantive holdback on full time well paid hires. All of this is making the unemployment rate appear much better than reality. If only 63.5% of the working age population is fully employed, we have a major problem and maybe tapering is not timely. If there is all out war in Syria and Iran then tapering is not best to do right now.  If there is a possible gridlock over the debt ceiling or just a continuing resolution for 90 days which would only add uncertainty, then maybe the Fed holds off, or just does one taper and then stops for awhile which in itself would just add uncertainty.

The bottom line here is that pricing of Treasuries is not a clean fair market price right now and is not likely to be for months to come. Tapering is not at all clear and will be possibly driven not by employment but by major world events. That will add uncertainty and that makes hedging that much harder for CMBS originators.

All in all, it is likely the debt markets will remain murky and certainly volatile for months to come, and it is completely unclear where this all goes over the next several months. It may become harder to get debt closed, but it is probably best to just try to lock in a long term fixed rate loan now and know you are done and fixed, than to try to ever figure out timing and predict rate movements in this uncertain world.  You are in the real estate business and stability and certainty of your capital is far more critical than trying to time the debt markets and not even being sure if they will be properly functioning. Maybe you could get a slightly better rate in three months, but maybe you can't get anything at all because there is a major war on and oil is $150. There is no way to know.