Starting today, the FOMC will convene for their monthly meeting. Tomorrow they will likely announce no change to their Target Fed Funds Rate currently at 1.00 to 1.25 percent and a protracted unraveling of their balance sheet of long-duration fixed-income securities. While the sales won’t likely begin until October, and largely constitute Treasuries and agency MBS, the news will reverberate through the marketplace almost immediately; in truth it already has. After a few days of retreat in yields due to Atlantic hurricanes and missile tests from Pyongyang, 10-year UST yields have buoyed back to 2.22 percent. According to a report they have published, Bank of America Merrill Lynch thinks this will be a precursor of events to come as the Fed unwinds $1.4 trillion (with a “T”) in securities through 2021.
How high could rates rise as a result of the sales? According to BAML, 25 to 50 basis points above current rates and a 10-15 basis point steepening in the yield curve. Why would this effect take place? Thinking about the process of the includes termination of asset purchases, Treasury increasing issuance to accommodate the large-scale payoff requirements to the Fed, and the Fed in turn burning the cash with which they are repaid, limiting the stock of money in circulation. A full work-flow is provided below.
Image Source: Bank of America Merrill Lynch
Be very attentive to market conditions daily over the next few months. If you are motivated to lock-in low-cost capital, then you may wish to act swiftly.
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.