During the month of April, the 10-year US treasury, the benchmark for commercial real estate lending, was extremely unstable. Throughout the month the 10-year treasury fluctuated by more than 30 basis points. A recent Wall Street Journal article noted that Morgan Stanley and Goldman Sachs, two of the best economic forecasting teams of the last few years, couldn’t differ more about where treasuries will go next. Morgan Stanley believes the 10-year will rise to 5.50% by the end of this year while Goldman Sachs believes it will fall to 3.25%. This 225 basis point difference represents a huge threat for corporate, consumer, and government borrowing costs. Goldman’s forecast would put rates near 5%, a generational low, while Morgan Stanley’s forecast would put rates past 7%, the highest in a decade.
Morgan Stanley’s head of interest rate strategy Jim Caron reasons that the market can’t endure the $2.4 billion worth of government debt that will be issued this year. He says, “We’ve never seen this much supply in the history of the bond market.”
Goldman’s view is that government borrowing is simply replacing private credit demand, which will return. “Ultimately, we don’t find supply to be of such great predictive power regarding what happens to interest rates,” says Goldman’s economist Jan Hatzius.
Regardless of future interest rate volatility, more and more lenders are allocating funds for commercial real estate loans this year. Life insurance companies are becoming more aggressive to win deals as conduit lenders are re-entering the market and banks are making loans for strong borrowers willing to transfer deposits. Interest rates are near all time lows and most owners and investors are taking advantage of low rates now, rather than risk going out to the market in the next 12-24 months.
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