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Economists predict little chance of recession in the short term

Tags: commercial rates
Thursday, May 02, 2019
by Angela Kesselman

The yield on the 10-year Treasury fell below the effective federal funds rate last week, resulting in an inversion of the yield curve.  In the past, a yield curve inversion was thought to be a high predictor of a recession, but several other factors have come into play this time, which leads economists to another conclusion. 

Economists at the major banks believe the inversion will have minimal impact on the sales or debt financing markets. Moreover, yields on the 10-year and two-year Treasury bonds have not inverted.
The 10-year Treasury yield has dropped significantly since November and was below that of the three-month Treasury in the past week (2.39% vs. 2.43% as of March 28), including the following recent movement:

  • Down 86 bps from the high on November 8, 2018 (3.23%).
  • Down 65 bps since January 1, 2019.
  • Down 38 bps since March 1, 2019.

In today’s economy, it is believed that the yield curve would need to invert significantly and remain inverted for weeks, if not months, before it would be a reliable recession signal. The yield curve inverted for at least six consecutive months prior to the past three recessions. Therefore, the probability of a recession remains low.

To predict recessions, the new modeling framework depends on interest rate hikes. At its March meeting, the Federal Open Market Committee (FOMC) changed its monetary policy stance from raising the fed funds rate to a “patient” stance. The market-implied consensus is that the FOMC may not raise rates in 2019 as fed funds futures put a zero probability of a rate hike in 2019 and instead a 76% probability of a rate cut in 2020.

Current changes in underwriting:

Fixed vs. Floating: Short-term rates are expected to fall further and with the lower rates, we are seeing an increased interest in short-term debt.                                                                                                                                                                                                     

Construction:  Some banks have slowed their construction lending due to macroeconomics in the economy.  The rise of non-bank financial institutions will give the market additional liquidity, particularly in the construction sector, rather than from banks than are non-bank financial institutions.

Cap rates:  Remain at all-time lows.

Spreads:  Spreads have remained mainly flat for the past few weeks.  FNMA and FHLMC have seen some tightening.

As a commercial mortgage advisor, I can assist you to find the best loan product to meet your financial goals.  Give me a call or email to discuss your transaction.

Angela Kesselman
Commercial Loan Officer
The Madison Group

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