Where Are We Now?
At the time of publishing this article, it has been 60 days since the Fed reduced the effective rate by 50 basis points from 5.33% to 4.83%. At the same time, we've seen interest rates for commercial property loans INCREASE... some by as much as 75 basis points from their September lows. Why is that?
Treasury Yields and Commercial Interest Rates
"The Treasury Market is the basis for almost all capital deployment." -Ray Dalio
Historically, it is the Treasury Market, specifically the 10-Year Treasury, that sets the bar for commercial interest rates, not the Fed Funds Rate. Understanding this relationship provides insight into how lenders and investors factor risk for commercial assets.
Factors Influencing Treasury Markets
Treasury yields are on the rise due to several key factors. Increased government borrowing has led to a surge in the supply of Treasury bonds, pushing yields higher. Additionally, concerns over persistent inflation and uncertainty about future Fed policy have driven investors to demand higher yields as compensation for increased risk. These dynamics are contributing to upward pressure on Treasury rates.
The Lag Period
There's a common misconception that reducing the fed funds rate IMMEDIATELY translates to lower commercial interest rates. That is not the case. In fact, historically there has been a lag period, usually no more than 6 months, between the reduction in rates from the Fed and Treasury yields.
Where Are We Going?
It seems as if the Fed's restrictive monetary policy has accomplished it's goal of tamping down inflation AND there is ample reason to assume that erring on the side of caution is of utmost importance to the Fed's monetary policy. The last thing the Fed wants to do is spark a second wave of inflation by easing off too quickly. Our group believes that with some additional rate cuts, and a clearer political landscape, we could see Treasury Yields decline in the first half of 2025. Time will tell.
In the Meantime...
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