Market Yields Rise As Fed Signals Pause
Market and Economic Insights
Bond yields have seen a significant rise in recent weeks, with traders assessing the impact of President Trump’s pro-business, pro-spending agenda on inflation and the broader economy. While a strong economy supports higher yields, concerns over tariffs and a focus on on-shoring U.S. manufacturing are inflationary. At the same time, plans to expand domestic oil and gas production could counterbalance inflation. Worries over the growing national deficit and ballooning debt continue to push yields upward.
Inflation and Cost of Living Concerns
We’ve expressed concerns about inflation risks previously, and they remain. The cost of living has surged over the past few years, leaving many Americans struggling to keep up with price increases. Despite economists’ claims of cooling inflation, everyday expenses have risen significantly as incomes lag. This disconnect leaves many feeling uneasy about their financial stability.
Fed’s Policy and Market Reactions
The Fed is signaling a halt to further rate cuts in December. Currently, Bloomberg places the odds of a cut at under 60%, down from over 85% just a few weeks ago. A booming equity market, tight credit spreads, and a surge in cryptocurrencies suggest that financial conditions may not be as restrictive as the Fed has assumed. With market optimism running high, a pause in December is likely the prudent choice, even if it’s not ideal for real estate. However, the worst-case scenario would be another Fed pivot leading to a rate hike, potentially destabilizing markets further.
Outlook for Real Estate
Despite higher rates, there’s a silver lining for residential real estate. Private banks are offering competitive rates and sacrificing margins to attract business. Additionally, non-QM products are priced favorably compared to traditional A-paper loans, providing flexibility for borrowers eager to buy or refinance without being penalized.
We are also seeing an uptick in our commercial borrowers seeking floating-rate loans in the hope that rates will slowly decrease, at which point they could lock in a longer-term loan. As short-term rates are priced off of either short-term Treasuries or SOFR, these rates have seen a nice reduction.
