As debt mounts, the bond market could face significant challenges, ultimately causing interest rates on CRE loans to rise even further.
Inflation expectations are coming under pressure. When will the Fed cut rates? How long will it be before CRE gets closer to pre-pandemic conditions, if not zero interest rate policy?
But there is another storm looming, one that some have warned about but that has been largely ignored: the level of government debt, which, according to U.S. Treasury Department figures, stands at nearly $34.6 trillion. The Peter G. Peterson Foundation is a nonpartisan, nonprofit organization. The reasons are structural factors, including a large aging population, rising health care costs, and government spending that does not generate enough tax revenue to cover what Congress has authorized.
Deficit spending requires further borrowing through government debt As Reuters I will report. “Investors are bracing for a flood of Treasury issuance that could erode bond price gains over time, with no end in sight to large budget deficits ahead of this year's presidential election,” they wrote.
The mechanism they are concerned about is straightforward: there are three methods the US government can use to raise revenue to pay its debts. The first is taxes, but the amounts are nowhere near what is needed. The second is printing money, which ends up causing inflation. The third is borrowing, which is the method the US has used for generations.
Borrowing trends follow basic economics with one trend in mind: bond prices and bond yields move in opposite directions. The higher the demand to buy bonds and lend money to the United States, the lower the yield the government can offer. The more debt the government wants to sell, i.e. the greater the supply, the higher the yield must be to attract buyers. And the more the United States is presented as a riskier borrower, the higher the yield lenders/buyers will demand, and the more the government has to borrow, the riskier it appears.
Ella Hoksha, head of fixed income at Newton Investment Management and a fan of shorter maturities in government debt, said benchmark 10-year Treasury yields, currently around 4.4%, could rise to 8% to 10% over the next few years. Reuters. “It's not sustainable in the long term.”
On the other hand, in some areas The concerns have reached nightmare levels. Jeffrey Gundlach, CEO of investment management firm DoubleLine Capital, worries that the U.S. government's growing debt burden could eventually lead to an unprecedented restructuring of U.S. government debt.
The world is likely to see the debt restructuring as an admission of problems and greater risks, which will send yields higher.
CRE Bottom Line: 10-Year and SOFR Yields Rise; The two are strongly correlated and lending rate standards will push up property borrowing rates.
