As President-elect Donald J. Trump prepares to take office, the bond market appears increasingly jittery.
The 30-year Treasury yield reached a 14-month high of 4.86 percent on Monday, its highest level since October 2023, when it crested past 5.1 percent. The 30-year Treasury generally traded below 3 percent from late 2011 until mid-2022, when Federal Reserve Chairman Jerome Powell began raising short-term interest rates to fight inflation.
The 10-year Treasury, the benchmark long-term interest rate for much of the U.S. economy and commercial real estate system, hit a yield of 4.61 percent Monday, up from a yield of 4.15 percent on Dec. 6.
Last year, the 10-year Treasury yield reached 5 percent, its highest level since 2007.
Katie Hubbard, executive vice president of capital markets at Walton Global, an asset manager and investor, told CO that Treasurys become less attractive to investors when expectations around inflation tend to grow, thereby creating less demand for the bond, driving the price down and generating higher yields to make the bonds more attractive to purchase.
“If yields go up, it means people are more concerned about inflation,” she said.
The U.S. government plans to sell $58 billion of three-year Treasury notes and issue $119 billion of government debt this week, according to a report from Bloomberg.
Treasurys — either T-bills, T-notes or T-bonds — are U.S. bonds that can mature at anywhere from 30 days to 30 years, and serve as the foundation of the U.S. financial system. The yields of these short-term and long-term bonds, which are less publicized than the Federal Reserve‘s federal funds rate, set the borrowing costs for critical loans such as government debt, home mortgages, credit cards and auto debt, corporate loans, and, of course, commercial real estate loans.
Experts have argued that Trump’s policy of deficit spending, tax cuts, mass deportations of illegal immigrants and higher tariffs will all create inflationary conditions, or at least influence investor sentiment that inflation will remain high.
“When you think about it, all those policies are inflationary in nature, and that’s influencing investor expectation about higher rates,” explained T.J. Parker, senior vice president of data and analytics at Bell Partners. “And when you see higher inflation, the 10-year Treasury tends to tick up.”
All this is bad news for commercial real estate players. Commercial real estate values are uniquely tied to the 10-year Treasury due to the quasi-fixed-income nature of real estate investment and because investors seek rates higher than the 10-year Treasury yield to ensure a profit is made on every loan.
Most real estate investment requires spreads at least 200 to 300 basis points higher than a Treasury note. So when Treasury yields increase close to 5 percent, it pushes cap rates (the potential return investors make on properties) higher as well, creating cap rate expansion around falling CRE property values.
“It puts pressure on cap rates, just like all types of real estate,” said Daniel Goldberg, president of Core Spaces, a student housing development firm. “Cap rates are 125 basis points higher than they were two years ago.”
Brian Pascus can be reached at bpascus@commericalobserver.com
