Bonds have been declining in recent weeks following a 25-basis-point rate cut from the Federal Reserve and expectations of further cuts amid rising concerns over an impending recession. Recession concerns were underscored Wednesday by the inversion of the U.S. and U.K. two- and 10-year yield curves and the fall of 30-year Treasury yields to 2.07%, a record low. While this trend in the bond market will likely drive down the 30-year fixed mortgage rate and translate to more purchasing power for home buyers, it will do little to juice the market for commercial real estate.
The 10-year U.S. Treasury rate dropped to 1.58% on Aug. 14, its lowest level since October 2016. The real estate industry is closely affected by movement in interest rates, but the impact varies by subsector. A decline in the 10-year U.S. Treasury rate has historically led to a drop in the 30-year fixed rate, boosting the refinancing and home buyer markets. With the Treasury yield this low, it is likely that 30-year rate will drop below 4% this fall from its current 4.03%.
In the residential space, the resulting cheaper mortgages will make homes more affordable for potential home buyers, and promote refinancing and the taking on of home equity loans by existing homeowners. MBA mortgage applications rose 21.7% in the week ended Aug. 9, primarily driven by homeowners refinancing.
Commercial real estate investors are generally more sheltered from interest rate movements and will not experience as much of a shift from the drop in the 10-year Treasury rate. Property values have continued to increase in the current market cycle, so cap rates have gradually compressed independent of movement in the 10-year Treasury.