In the Analysis on Tapering QE3 post Tuesday I included a chart of the US 10 year Treasury rates and you could see them going vertical in the days since the Fed announcement and Bernanke’s press conference last week. We’re in the middle of negotiations on an apartment acquisition with a client and so what interest rates do over the next few days and weeks is extremely important to us. So here’s the updated chart:
We concentrate on the 10 year Treasury because that is the benchmark most lenders base their long term rates on. In order to lure investors away from Treasuries to buy mortgage bonds lenders have to offer a premium (AKA ‘spread’) over what can be earned on the Treasury. So when the T10 moves, rates on all kinds of longer term loans including on apartments move too. You can see that while the rate typically bounces up and down a bit, in the last week it’s gone up in almost a straight line with no zigs or zags.
As I mentioned in the last post traders apparently took the Chairman’s words to mean that ‘tapering’ was about to start/QE Infinity was ending and the frat party of liquidity was turning into the epic hangover of having to depend on a real economy that may be falling back into recession. Bill McBride makes a very good case that they’re wrong but it’s the traders who have their fingers on the SELL! SELL! button, not reasonable, dispassionate people like Bill.
It turns out that on Monday night before the announcement traders also got a crack like jolt on top of their beery liquidity high when President Obama appeared to be firing Chairman Bernanke live on the Charlie Rose Show. According to reports a number of traders took that as a sign to buy more Treasuries:
But when the Fed minutes were released it was straight into Mortimer and Randolf mode as they decided they had bet the wrong way and now needed to unwind their trades pronto.
Now I don’t give two twits what happens to traders but the fact is they move the market which affects our ability to borrow money at reasonable rates. That is a fundamental problem that comes from letting Wall St. run wild with little (virtually no) effective regulation. We can hope that the market is now ‘oversold’, that prices were driven too low/interest rates too high and will trend back to the recent range soon but who’s to say? As Neils Bohr quoted: “Prediction is very difficult, especially about the future.”
In the mean time if you are active in the CRE or apartment markets either buying or selling I would check in regularly with your lenders to see what rates are doing. If you would like to track the 10 year Treasury yourself I’ll send you the Excel sheet that I built to make the chart at the top. Send us a message with ’10yr Treasury’ in the subject and we’ll reply with the xls and the link to the Treasury data.