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,
- Down 38 bps since March 1,
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
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
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
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.
Commercial Loan Officer
The Madison Group