What's going on with Rates?  

$4.75T of Commercial Real Estate is impacted by these Macro Economic Trends.

There is $4.75T in outstanding debt secured by Commercial & MultiFamily properties in the U.S.A. with over a $1~ Trillion in California. If you are planning a RE Development project or own commercial Real Estate, you will have important financing decisions to make over in the next 1-3 years. 

Here are the most compelling Macro Economic Trends to follow:

1. The Federal Deficit is $34T and Counting….

  • Our growing Federal Deficit of $34T-$37T means more debt issuance by the US Treasury.

  • For the past 3 decades, Leadership in Washington DC has been unable to balance the budget. 

  • Like a Property that looses money; Investors and Lenders will demand higher rates of returns for their capital. Our Deficit has long-eclipsed GDP, which stood at a mere $29T in 2024, and will likely continue to be a main driver of “higher yields for longer”. 

2. Will Fed Rate Cuts Reduce Yields on 3, 5, 10 or 30 year Treasuries?

  • There is a lot of noise in the media surrounding Federal Reserve rate cuts, when it reduces its Overnight Rate which is the costs that it lends capital to Banks and other Intermediaries. 

  • The general thought is that if the Fed reduces its overnight rate, that bond investors will soak-up demand for longer duration notes like 5, 10 or 30 year Treasuries which bring down their yields. However, there is not a guaranteed link between lower overnight rates and lower yields on 5, 10 or 30 year Treasuries. Even if we see Fed rate cuts as anticipated of 110~ bps over the next 18 months, we still may experience a steepening yield curve. 

3. Stealth QE I: The Fed has STOPPED unwinding its balance sheet. 

  • Concerns from Liberation Day led to a huge spike in Yields on US Treasuries, which unnerved the Fed. During the COVID Quantitative Easing (QE) Era, the Fed increased the size of its balance sheet to HISTORIC highs of $9T. But as of April 2025, the Federal Reserve has effectively STOPPED selling off securities including $4T~ of US Treasuries. We must ask Why? The main reason the Fed would pause selling off its balance sheet is relieve upward pressures on UST Yields.

When considering Term financing, use this simple tool from Chatham Financial to review current & future interest rates.

As illustrated in the Forward Curve, the Market anticipates that 3 month SOFR will fall by 110~ BPS by the end of 2026, and that Long Term Yields (those 5, 7, 10 & 30 Year Treasuries that underpin many Term loans) will increase slightly over the next decade. 

4. Stealth QE II: US Treasury sells less longer dated bonds, while increasing shorter duration notes.

  • In Q3 2025, the US Treasury is increasing short term debt issuance by almost 100% from $554B in Q2 2025 to $1T-  A strategy appropriately referred to as “Stealth Quantitative Easing”.

  • “Skewing Debt issuance to more shorter dated bonds allows the US Government to step up its borrowing without sending yields on longer-dated bonds higher. The yields on longer dated bonds determine interest rates across the economy from the government’s borrowing costs to mortgage rates”  Source: FT Fixed Income

5. Lastly, Yields on Japan’s sovereign debt have risen from 1.04% (1 year ago) to 1.56%~ 

  • Japan is the largest foreign holder of US Treasuries. The Yen Carry Trade has historically been an outlet for Japan with traditional lower borrowing costs to earn profits while buying US Treasuries. They borrow at 1%~ and buy USTs which yield at 4%+ to pocket the difference. If Yields on Japanese Debts remain elevated and demand from Japan diminishes, yields on UST’s will rise.

General Advice if you have important Real Estate Financing decisions over the next 1-3 years: 

Don’t be afraid of borrowing on SOFR, or a 6 month ARM.  30-Day SOFR is current at 4.31%

  1. If you’ve recently completed a project, or are entering a construction loan; don’t hesitate to lock in the low end of the curve (3 Year UST) or Shorter duration debt - including the opportunity to float on SOFR. Historically, the highest that SOFR has ever been in its 8 year history is 5.3% - which was after inflation reached 9%. The lowest that SOFR has ever been is 0%.

  2. Do not expect decreases to Yields on mid or long term US Treasuries.

    Ultimately, the yield curve is correcting itself, so we think that yields on short duration (3 years and less including SOFR) will fall, but we see several large bearish macro trends in the US and globally that may result in a higher long-end of the curve.

  3. The Fed’s Overnight Rate is less significant than these other major Macro Economic Trends

    If you are planning a construction project or recently completed a property, it’s important to follow rate cuts, SOFR and shorter duration debt; but for most property owners these mid and longer dated treasuries, and these other Macro Economic Trends are more significant. If the Fed cuts rates, but yields on 5, 7 or 10 Year UST’s rise or stay stable, there will not be an explosive boom to the economy, nor will it free up sizeable proceeds for most Real Estate Assets.

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