Insight By: Miguel Jauregui
Over the past few weeks, bond yields have been on the rise, and this is important to keep a tab on because it largely drives the interest rates we see in CRE. The past few weeks have seen bond yields move upwards of 50 bps which has resulted in interest rates being pushed above the 6.0% mark across the board.
To take a step back and provide some insight, this increase in bond yields is mainly due to concerns about rising inflation and a potential increase in interest rates by the Federal Reserve. As inflation expectations rise, bond investors demand higher yields to compensate for the eroding effect of inflation on the value of their investments. Furthermore, the market had been pricing in potentially two more 25 bps Fed rate increases. However, with the most recent figures, some investors are pricing in more Fed rate increases beyond that.
Annual CPI came in at 6.4% for January, which is down from 6.5% in December; however, it’s an increase of 0.5% month-over-month, which is higher than the 0.1% month-over-month we saw the month before. The Fed’s preferred inflation gauge, the annual PCE, came in at 5.4% for January, which is up from 5.3% in December, and that had an increase of 0.6% month-over-month, which is also higher than the 0.2% month-over-month we saw the month prior.
As it pertains to other data points to watch, in January, we saw consumer spending rise 1.8% versus a decrease of 0.2% the month prior, and personal incomes rose 0.6% versus an increase of 0.2% the month prior. Additionally, our economy saw 517,000 jobs added in January which decreased the unemployment rate decrease to 3.4%, a 54-year low. Lastly, and most recently, the University of Michigan consumer sentiment came in at 67.0, up from 64.9 in January and 59.7 in December.
In a world with inflation running at the highest rate since the 80s, great economic news isn’t good news because it continues to tell us that the economy is hot, which is not what we want when we want to see it cool down with no surprises. What we want is a soft landing, but data like this tells us a hard landing is a possibility.
The next Fed meeting is March 21-22. Expect the Fed to keep in tow and not rock the boat by keeping steadfast with another 25 bps increase (giving us a new target of 4.75% – 5.00%). The vast majority are in favor of this, with the business news reporting that a few members may be looking at a 50 basis points increase. Consistency looks better than aberration here, and we hope there are no February data surprises that come up between now and then to change expectations.
For more insight on the current lending environment, rate quotes, or recently closed transactions, reach out to Miguel Jauregui: (646) 809-8854 | mjauregui@sabcap.com
