As inauguration ceremonies conclude in Washington, D.C., President Trump begins his real campaign, carrying forward efforts to galvanize the country’s sense of self-determination. Meanwhile, the fixed income markets are providing investors with a similar sentiment.
As indicated by public fixed income markets, the recent rise in debt WACC has cooled dramatically. Though the 10-year UST remains elevated, compressing corporate bond spreads are helping to soothe the sting.
Since Election Day, investors have witnessed a 10-year UST yield that edged to a high of 2.63 percent on December 15 but has proven more range-bound since, see-sawing around 2.45 percent since New Year’s Day. The first three weeks of the new year have therefore exhibited a more normalized, sideways trajectory to the benchmark interest rate. Calmer nerves abound.
Ad interim, and more relevant to many of our clients, the corporate bond market is preparing for higher profitability, ostensibly driven by accommodative fiscal and tax policy.
Corporate bond spreads to the 10-year UST are excellent indicators of the course of capitalization rates and mortgage credit spreads. Since peaking on December 8, the spread between the 10-year UST and 10-year BBB (capitalization rates) has compressed by approximately 20 basis points – fully offsetting the concurrent rise in the 10-year UST yield. During the same time period, the spread between the 10-year UST and the blended 10-year BBB/A (credit spreads) has compressed ~15 basis points – again fully offsetting the concurrent rise in the 10-year UST yield.
In other words, the higher benchmark interest rate has been offset with higher risk tolerance from the corporate bond investing community, the net result being flat “all-in” yields to investors.
With continued stability in the sovereign bond market, accommodative economic data and favorable year end 2016 financial results from domestic corporations, the brief era of commercial real estate price instability could subside.
Forgive the oxymoron, but everyone wishes to “control their own destiny.” So far in 2017, it would appear commercial real estate investors are on a better track.
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.