Written by: Chuck Cronin on 1/26/23
We believe this is a critical question you must consider when developing your Commercial Real Estate (CRE) financing strategy. Attached please find a 2-page PDF interest rate history graph we think will help; it is plotting:
- The Fed Funds Rate (GREEN LINE) from 1954 to 2023.
- The 10-year treasury (BLUE LINE) during the same period.
- The national debt as a % of US GDP (LIGHT GREY LINE) back to 1966.
- The light grey shading vertically up and down shows periods of recession from 1954 to 2023.
A few points to consider:
- We believe history repeats itself.
- In every recessionary period, except 1959, the recession was preceded by the Federal Funds Rate exceeding the 10-year treasury rate.
- In these periods reviewing the length of time: fed fuds rose, plateaued, dropped, and then bottomed. This can give one a flavor for when the fed may stop raising rates and how long before the sharp decline that has occurred in every recession.
- Note the Fed Funds rate today (4.50%) compared to the 10-year treasury (3.44%) rate today. The spread differential of more than 100 basis points between the two has only existed one other time – during the 1980 recession period when inflation was rampant.
- We expect the Fed to raise the Fed Funds Rate by another 50 basis points (25bp on Feb 1 and at least 25bp on March 16)
- We believe the light grey line (national debt as % of GDP) illustrates that if rates rise to historical levels (ex. 1980), those levels will cripple the country. When rates in 1980 were 18% the National debt was only 40% of GDP. Current levels with Fed funds at 1980s levels could bankrupt the country as the nation’s debt load currently exceeds annual GDP. Hence our conclusion the Fed can not raise rates too much more.
- While the fed funds rate was declining from 4.5% in 2007 to nearly 0% by 2009 our elected officials were spending and the national debt increased from roughly 60% of GDP to now more than 120% of GDP.
- Very simply the Country is spending more than we are producing (how long can this last? ) and the Government may not be able to afford much larger rate increases.
- We are not making a political commentary about spending, but rather just stating some facts that may help in developing CRE Finance Strategies
We believe there are ways of hedging decisions through proper loan structuring that can help through this volatile changing rate environment there by optimizing your future results. For more information on rates visit axiom-capital.com.