Treasury yields have been rising fast. The 30-year is at levels unseen since 2007, 4.95%, according to Federal Reserve data — the hot run-up to the Great Recession. Same for the 10-year, standing at 4.78%. The 2-month (5.59%) and 2-year (5.08%) are higher than any since 2006.
There have been sell-offs up and down the Treasurys line with prices dropping and yields heading up as a result.
"The bond market has tightened quite considerably over about 36 basis points since we met in September," said Federal Reserve Bank of San Francisco President Mary Daly at the Economic Club of New York on October 4, according to Yahoo Finance. "That is equivalent to about a rate hike. So then, the need to do tightening additionally is not there."
Perhaps. That was, of course, before the September job numbers released on Friday showed a jump double what experts had expected, complicating the picture and increasing the possibility of another rate change as early as November, though not pushing it to a greater-than-50% chance.
"Speaking on a Bloomberg podcast that was recorded on Tuesday and aired on Thursday, Goolsbee said, 'it's clear that the long rates coming up is what you'd expect' when recession fears that were prevalent earlier this year have abated," Reuters reported.
But seeing the Fed holding back on a rate hike isn't necessarily a harbinger of joy for commercial real estate borrowers when the reason is higher bond prices.
The reason is that, as always, Treasury instruments are considered as safe as investments get. They become a foundation for calculating risk-adjusted returns. If someone is looking to borrow for a 6-month period, then existing 5.59% yield makes a baseline an investor will absolutely look to beat. If that is higher than similar short-term bonds have seen, then you can bet interest rates on shorter-term loans are going to be significantly higher.
Similarly, the 10-year is often associated with house mortgages, affecting home buying and, therefore, construction.
From that viewpoint, it doesn't matter whether the Fed raises the benchmark federal funds rate or not. If bond market yields go up, so will the loans CRE investors depend on.
And it's not as though the Fed has been solid in its conviction that conditions would quickly improve. Multiple officials have been seemingly working to manage expectations, saying that another interest rate increase this year might still be possible.
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