U.S. Treasuries

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  • Brexit with Flag

Brexit – How it Impacts U.S. Commercial Real Estate

July 9th, 2016|

In spite of everybody and their brother having written about the United Kingdom’s vote on June 23rd to leave the European Union I believe I can provide a bit of clarity for my readers with some well-chosen, pithy comments.  So here goes.

Make no mistake, Brexit will have enormous impact on the world economy and more importantly, from our point of view, on commercial real estate in the United States.  But before I explain how it will affect U.S. CRE, let’s review the impact it is already having on the world stage, in the short few weeks since the Brits voted to leave the European Union.

Four Major Impacts on World Economy

  1. The value of the Sterling pound in relation to the U.S. dollar has dropped precipitously, losing 14% of its value.
  2. U.S. Treasuries rates have plummeted. The 10 year treasury rate traded at 1.67% before the vote and as of July 8th, it closed at 1.36%.  This is the lowest rate on record!
  3. Bank stocks in the U.K., the E.U. and the U.S. have dropped about 36%, 25% and 8% respectively.
  4. The U.S. dollar in relation to a basket of other currencies continues to strengthen.

These are some of the unintended consequences of the Brexit vote.  It will take years to fully feel the impact of this historic decision resulting in a lot of uncertainty which the markets of the world absolutely hate.

Other possible Brexit related carnage: (more…)

  • treasury rates question mark

Why U.S. Treasury Rates Will Continue to Decline

June 24th, 2016|

Over the past couple of years I have gone out on a limb and stated unequivocally that U.S treasury rates will not rise any time soon.  While all the pundits keep predicting that The Federal Reserve Chair Janet Yellin will raise the federal funds rate, I’ve consistently said whatever action she takes is relatively unimportant to five and ten year treasury rates.

Past Comments

Shown below are a few examples of what I’ve said: (more…)

Cap Rates Too Low? Heck No! Find Out Why

April 1st, 2016|

 A Pessimistic Belief Eviscerated

Before you accuse me of “drinking the Kool-Aid,” i.e., having a point of view about cap rates that doesn’t hold up under critical examination, let me assure you that by the time you finish reading this blog post you will at the very least understand my point of view.  You might even be convinced I’m right!  So here goes:

I recently attended the Sperry Van Ness Economic Forum in Salem, Oregon.  One of the speakers was Jim Costello of Real Capital Analytics.  As the name implies, Real Capital Analytics is a data and analytics firm that focuses exclusively on the investment market for commercial real estate.

About half way through Mr. Costello’s presentation he showed us a chart that made me almost get out of my chair with excitement.  It was if a commonly held pessimistic belief was being eviscerated before my very eyes.  Ask almost anyone in commercial real estate these days about cap rates and you will hear concern about cap rates being too low, blah, blah, blah…  Am I right?  Of course I’m right.

The chart he showed that got me all excited is shown below: (more…)

China Liquidating U.S. Treasuries – How Will This Affect Interest Rates?

August 29th, 2015|

For the past year I have held a contrarian view about the inevitability of rising treasury rates. As recently as July 29th I gave three good reasons for my position and then concluded with: “Stop drinking the Kool-Aid when it comes to the idea that interest rates are going to rise significantly any time soon.” (more…)

3 Myths about the Inevitability of Interest Rates Rising

July 29th, 2015|

I have many friends and colleagues who believe that it is only a matter of time before interest rates start rising. They say something like, “Rates can’t stay this low forever.” Well I’m here to say that they are partially right. Interest rates can’t stay down forever, but they can stay low for the foreseeable future. And that is what I think they’ll do. I know my view on interest rates is contrarian to the vast majority of pundits, but I don’t believe it’s based on wishful thinking. (more…)

Four Factors That Will Affect CRE in the Next 12 Months

July 12th, 2013|

While it’s routine to make predictions at the beginning of the year, it’s not so common to do so when the year is half over but I feel compelled to do so. There are a number of factors that have been set in place over the past several months that will start having an impact on commercial real estate. Let’s go through four of them:


The 800 lb Gorilla in the Room

November 4th, 2012|

Whether Obama or Romney gets elected tonight, the next administration within the next four years will have two major crises that they will have to confront head on. One has been discussed frequently on the campaign trail – Iran getting a nuclear weapon, the other has been virtually ignored.  It’s the 800 lb gorilla in the room.  We would prefer not to acknowledge that it even exists, which is, the inevitable financial collapse of Europe. (more…)

China to Start Liquidating US Treasuries

September 20th, 2011|

Over the past several blog posts, I’ve focused almost exclusively on the sovereign debt crisis in Europe, and for good reason.  The next jolt to the world economy will likely come from Europe.  How well or should I say how poorly the European Union handles Greece defaulting on its bond obligations will determine the severity of the impact on the world economy.  There are lots of interesting articles on the sovereign debt crisis in Europe that I could write about.  But I’m going to let that situation percolate awhile and instead focus on an obscure article I read recently in the British newspaper, The Telegraph. 

In this article by Ambrose Evans-Pritchard, the head of China’s central bank stated that Beijing plans to reduce its portfolio of US bonds as soon as it is safely possible.  At the World Economic Form, Li Daokui, stated that China will in the future be investing more in physical assets.  “We would like to buy stakes in Boeing, Intel, and Apple… Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,” he said. 

It is estimated that China owns $2.2 trillion of US debt, and is second only to The Federal Reserve in the amount of US debt owned.  While China accumulated US bonds over the last three decades, The Fed accumulated its bonds in the last couple of years as a result of the Quantitative Easing program, which ended in June of this year. 

China is clearly worried that about the US debt issue, which now exceeds $14 trillion.  Mr. Li described the debt deals this summer on Capitol Hill as “just trying to buy time,” saying it will not be enough to stop the growing debt crisis that is mounting.

It’s always interesting to see how the rest of the world looks at us in the United States.  So hearing the comments of a Chinese official in a British newspaper about how the U.S. is handling it’s debt crisis is like being the proverbial fly on the wall listening into a conversation about your class behavior between your grade school teacher and your mom.  It’s interesting to hear what they’re thinking but at the same time you know there’s going to be consequences.      

So why is this proposed change in China policy important to those of us in the commercial real estate industry in the Pacific Northwest?  Why should we care whether the Chinese are buying more of our debt or conversely liquidating their holdings of US bonds?  BECAUSE U.S. TREASURY RATES ARE DETERMINED BY SUPPLY AND DEMAND!!! 

We now know that both The Federal Reserve and China are planning to stop buying our debt.  So what happens when the top two buyers of our debt are no longer buying?  To make matters worse China intends to liquidate some or all of their holdings of US debt which will only add to the supply of bonds available on the market to be purchased.  Is it conceivable that the rest of the world can purchase their normal market share of US debt plus China’s and The Fed’s too?  I don’t think so.  Logic tells me it’s not possible but smarter people than me who are in the know may disagree. 

Assuming I’m correct, then the rest of the world cannot buy the volume of debt we are currently hemorraghing.  What then?  That means over time treasury yields (interest rates) will have to increase in order to entice enough buyers to buy our debt.  If treasury rates go up, then interest rates of all kinds will follow, including interest rates on commercial real estate.  One offsetting factor are the spreads over treasury rates that lending institutions are charging these days are close to an all time high.  If lenders wanted to absorb some of the rise in treasury rates they could do so by lowering the spreads they are charging.  That is a possibility.  Another possibility is that Congress and the president could pass meaningul legislation to reduce our budget deficits.  I’ll let you determine the chances of that happening…

Source: China to ‘liquidate’ US Treasuries, not dollars; The Telegraph Blogs, by Ambrose Evans-Pritchard, September 15, 2011.

How Bill Gross Got It All Wrong

September 5th, 2011|

Earlier this year Bill Gross, the head of bond giant PIMCO, announced in grand fashion that he was getting out of U.S. Treasuries. His reasoning was quite rational: The end of the Fed’s quantitative easing program, which ended in June, would be bad for bonds. Prices would fall causing yields (or interest rates) to rise. This would happen because the Fed was the number one buyer of U.S. debt. Without the Fed buying bonds one of two things would have to happen to prevent yields from rising:

  1. Some other country would have to step in to buy the Fed’s volume of U.S. Treasuries which was highly unlikely, or
  2. The U.S. government would have to significantly moderate their borrowing to shrink the volume of U.S. Treasuries being sold on the market. At the present time for every $1 spent by the federal government about 40 cents of that amount is borrowed.

So what do you think are the chances of either #1 or #2 happening? Not likely is it? Looking at it from this perspective, it seemed quite unlikely that another country could purchase the enormous quantity of bonds that the Fed had been buying over the last two years. And it also seemed unlikely that the federal government would reduce its need to borrower.

This past week people were crowing about how Bill Gross got it all wrong and how he lost a lot of money for his bond fund investors. He even admitted sheepishly that it had been a “mistake” to get out of U.S. treasuries. Since Mr. Gross’s announcement in March the 10 year treasury rate has plummeted from 3.46% to 2.02% (Sep 2nd). So how does someone of Mr. Gross’s caliber get it wrong? What did he miss?

Back in March when Mr. Gross made his announcement there was no way for anyone to predict:

  1. That the sovereign debt crisis in Europe would reach critical mass this year. European leaders had been successful over the years in “kicking the can down the road” and it seemed likely this year would be no different. Wrong!
  2. What the impact of the sovereign debt crisis would have on the U.S. treasury market. Fear of a default of sovereign debt by Greece and then by Italy has caused a panic among Europeans. And when panic ensues, investors take their money out of risky investments promising a return on their money and instead invest in less risky investments, in this case U.S. treasuries, where they focus on getting a return of their money.

What has happened is the law of supply and demand has kicked in. Concerned European investors have dramatically increased the demand for U.S. treasuries while the supply has stayed the same. When that happens, yields decline. It’s really that simple.

But the big question is, “How does this affect those of us in the commercial real estate market?” We are currently seeing historically low interest rates.  A lower interest rate means a lower mortgage payment which means better cash flows after debt service. If you own commercial real estate now is the time to lock in long term fixed rate financing.

I know I sound like the boy who cried wolf one too many times but some day we are all going to wake up and the world will be different. Some unpredictable catastrophic event will have occurred (a run on U.S. banks perhaps) causing interest rates to skyrocket and when that happens those who had the foresight to lock in the low rates will be the big winners.

Source: Bill Gross and the Case for Buy Low and Hold, Morgan Housel, The Motley Fool, August 31, 2011.

What Happens if Debt Ceiling is Not Raised?

July 30th, 2011|

You may be thinking I’m going to weigh in on the debt ceiling debate.  This reminds me of the old saying, “Fools rush in where angels fear to tread.”  I’m not going there.  Not a chance.  I’ve heard everything from the world is going to end to nothing is going to happen and everything in between.  And likely you have too.  

What I am going to discuss is a bizarre side effect of this fiasco: contrary to everything I’ve ever read on this subject interest rates on U.S. treasuries are plummeting.  What’s going on here???   

Regardless of what happens on the debt ceiling debate the U.S. is likely to lose its triple A bond rating.  The rating agencies have been threatening a down grade of our nation’s credit rating not unless $4 trillion is reduced from our spiraling out of control federal deficit.  None of the proposals currently being considered are close to this amount of deficit reduction.  So the likely effect will be a downgrading of our bond rating.  If this happens then logic dictates that interest rates on everything will go up, from credit cards, to auto and home loans to loans on commercial real estate.  But no one really knows for sure the consequences of a down grading of our bonds.  No one.    

So how is it that on Friday last week the 10 year treasury rate plummeted 17 basis points and is now at 2.78% as of this writing?  This is the biggest one-day drop since December 2010.  A drop in interest rates seems so counterintuitive to me.  This is just the opposite of what I would think would happen.  The “experts” believe that investors view the stock market as being more adversely impacted by the debt ceiling debate than the bond market.  As a result investors are selling stocks (notice the Dow Industrials declined 537 points last week, the worst week this year) and are buying bonds.  Go figure!  There is a “flight to quality” – the selling of riskier assets, in this case equities, and the buying of the most secure investment available today – treasuries.

Other so-called safe havens will also benefit from this uncertainty caused by the debt ceiling crisis.  But gold, top-rated corporate debt or the bonds of other countries with triple A ratings are miniscual markets in comparison to the almost $10 trillion U.S. treasury market.  Investors are also confident that the U.S. Treasury will continue to pay the principal and interest owed on existing bonds, even in the case of a prolonged deadlock.      

In addition it is in China’s best interest, as the largest holder of U.S. debt, to come to our rescue if things got out of hand with a gridlocked Congress in order to prevent serious harm to their huge existing holdings of U.S. treasuries.  

So for these reasons we are seeing treasury rates declining.  At least for now.  This is a great time to be locking in long term fixed rate financing.  If you are on the sidelines wondering when I should refinance, what are you waiting for?   

Sources: Debt Ceiling Deadlock Could Lower Interest Rates, CNNMoney.com, July 28, 2011; and Treasury Yields Fall By the Most This Year, Market Watch, July 29, 2011.