Treasury Yields Aren't Dropping With Rate Cuts - When Will RE Recover?
For much of my career I did not understand treasury markets. In fact, I only recently began to study them after noticing that medium term treasury yields went UP after the Septmeber rate cuts. This led me to understanding (better) why things work the way that they do. (The US financial system is incredible.)
So, most of the industry seems to think that Federal Funds Rate cuts = lower interest expenses. This is NOT true, and treasury yields are primarily driven by bond auctions and the resulting "tail" or basically, the interest rate that the bond would "sell" at. In short, the free market (in a vacuum) decides treasury rates, not the Fed Funds rate.
So, what happens to this industry if yields stay where they are now? You would think that with the looming increase in inflation that we are nearly guaranteed to see over the next year, that yields will continue to RISE and not fall.
Do you guys see another crisis on the horizon? Where do things go from here? Do fund managers understand this, and they are playing coy?
Nothing ever happens
The interest rate market is just like the stock market. It's based on forward expectations, not what's happening now. The Rate cut that happened was already baked in prior to the announcement. If they'd said something that was against expectations (e.g., there will be 10 more rate cuts this year!) that would have affected them. And while it's true that mechanically the bond auction market is driven by free market economics, the Fed funds rate expectations are currently a major influence on where rates go.
We may at some point get to the point, like we were prior to the GFC, that it's not considered, but its position as a floor is still relevant.
Treasuries dropping could make things harder. Don't forget record liquidity on the sidelines still. If anything and people may disagree, we need for higher for longer. Market is too saturated.
I completely agree. We desperately need to raise rates significantly. The ONLY logical explanation I can come up with for as to why the Federal Reserve is slashing rates, is to cause a run-up in gold which they will then use to devalue their debt in terms of USD.
It's because of a softening labor market. J Powell said that
Yeah I don't think the FED is playing 4D chess here. The labor market is showing signs of weakness, which is why they cut rates. Anecdotally, I think we may already be in a recession. FED is in a very tough spot because they don't want a recession, but also don't want inflation. I think leaving rates elevated for longer and especially increasing rates could definitely lead to a recession, but at the same time, cutting rates too much could stoke inflation. As for RE recovering, i don't think relying on low rates qualifies as an RE recovery. There's an argument to be made that RE was artificially inflated due to artificially low rates from 2017-2022 and especially during covid. One could make the argument that higher interest rates, which will cause real estate prices to deflate is the recovery that we actually need. If your entire business model in real estate relies on rates to decrease and historically low rates, then I don't think it's a very good business model and the syndicators proved that.
Wut.
lol, they cut rates because daddy wants them to. Treasuries aren’t budging because the Fed has semi given up combating inflation.
Fed's behind the curve significantly. Most desks are already pricing and hedging for these cuts; therefore, as they are announced, the market is already there, desks are all assuming 125bps to 175bps in cuts by the end of Powells term. This last announcement was buy the news, selling the event. A couple of desks had been pricing for a 50bp cut and therefore had to unload a bit. I believe 28bps was priced in the day before on WIRP. Spreads across ACMBS, RMBS, ABS, and CMBS are tightening, though, so it'll have some movement as people try to grab higher coupons. At some point it'll have to grind in but not sub 3.50 on the 10-year any time soon.
Excellent observation: despite the fact that market demand at auctions truly drives the story, it's surprising how many people still associate Fed cuts with lower yields.
What I think that is amiss here is that investors often have a choice to invest in short term / floating rate or invest in longer term dated fixed income assets. There are a lot of factors at play here but indirectly, a decrease in fed funds spills into the treasury market (especially the short end of the yield curve). The common misconception though is that it is directly related but the treasuries pricing is determined at auction and largely reflect the expectations of future short rate pricing. So for example, if the expectations were that the rate cut is going to be 50bps and the rate cut is 25bps, then treasuries are going to go up despite the floating rate indexes dropping by 25bps. Hence this is why everyone is praying for rate cuts (but realistically everyone benefits more from the expectation of rate cuts rather than the rate cuts themselves; long dated treasuries impact cap rates which are a lot more impactful than the interest expense savings during construction).
K mods have deleted all my comments. I guess this is yalls thread now. Peace!
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