HFF Research Update: Bonds Take the Subway

Thursday, October 27, 2016

Insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

On this day in 1904, New York City opened its first subway passenger line. The city now boasts the largest rapid transit networks in the world. Today, we’re also going deep, looking hard at the fixed income space.

The on-the-run 10-year UST hit a yield of more than 1.86 percent this morning as bonds around the world extended losses in what will likely be the worst month since September 2014 – more than two years.

Bloomberg and Barclays’ Global Aggregate Total Return Index is reporting a 2.46 percent drop in the value of bonds globally MTD, contributing to a 3.22 percent decline since the index peaked in late August. The index points to a global bond market that has retrenched to values not seen since June.

Given the inverse correlation between bond prices and the yields they provide to investors, yields are thus rising. The extent of the rise depends of course on a bond’s individual credit rating and term to maturity. As the Rates Table published in a post earlier today bears witness, no segment is being spared with the long-end of the maturity curve being hit especially hard.

Though interest rates are rising unilaterally, the sovereign debt of several countries is still yielding negative interest rates, as the chart below demonstrates. Additionally, the extra yield investors purchasing USTs can enjoy relative to the peer set remains elevated, with the 10-year UST offering approximately 60 basis points of extra yield versus the United Kingdom’s 10-year gilt.

As yields have moved higher, spreads remain flat, thankfully. The yield on the 10-year UST has risen 30 basis points over the past month. Meanwhile, the yield on the 10-year BBB corporate and 10-year A/BBB corporate have risen almost in lock-step, resulting in spreads remaining near multi-year lows.

The havoc higher borrowing costs bring is obvious, so please be mindful of prevailing Treasury and SWAP yields on a daily basis. HFF remains constructive on cap rate spreads to the risk-free rate. However, higher borrowing costs could cut proceeds on refinance and acquisition loans.

As central banks around the world continue to modify their respective monetary policies, upside volatility could become more prevalent. The lack of conviction investors share for more quantitative easing, paired with surprising economic data such as the United Kingdom’s favorable gross domestic product release this morning, is the principal cause of the “risk-on” position investors are taking.

Watch out for the U.S. GDP release tomorrow.

About Jimmy Hinton

Jimmy Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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