How Will the 10-Year Treasury Yield Respond to Market Changes?

NEWPORT BEACH, CA—In 2011, CBRE’s National Retail Partners – West (NRP-West) has introduced its Pin the Yield on the Treasury contest. The idea was simple: Make your best estimate where the US 10-Year Treasury yield would land by year’s end.

That contest is still going strong today, so we caught up with the firm’s EVP, Philip Voorhees, about his personal predictions and on what the real question is about the treasury yield.

GlobeSt.com: What is influencing or impacting the Treasury Yield for 2018? Philip Voorhees: The real question may be, what does NOT influence the 10-Year Treasury Yield in 2018? That’s the incredible thing about the US 10YT: The yield the 10YT pays (determined by its price) effectively assimilates all of the available data about economic growth and/or contraction, political risk and/or stability. For example, Russia’s alleged poisoning of former spy Sergei Skirpal and his daughter led to the ouster of Soviet diplomats from NATO ally countries, including the United States. Or, the US imposing trade tariffs on Chinese goods. China is a massive owner of US debt, and if sufficiently perturbed, may elect to sell this debt at market prices. If you are a global allocator of capital (or, just a wealthy person focused on your investments), this series of events may (or may not) cause you to feel the world is riskier, at which point you would buy the US 10YT, the “risk free” investment yield, as a safe haven. Of course, other investors – with different or better market information – could choose differently. The 10YT is effectively a global barometer of risk, adjusted by the fraction of a second by the world’s most informed market participants.

GlobeSt.com: What is your forecast for the 10-Year Treasury Yield?

Voorhees: Personally, I expect very little change in the 10YT this year. Despite the fact that the US economy is nearly at full employment, and the major economies of the world all seem to be growing, there is a tremendous amount of debt outstanding globally. Rising interest rates will result in much higher interest costs for borrowers, from private individuals to countries. In the case of the US, the Congressional Budget Office (CBO) predicts interest rates will rise over the next 10 years, resulting in approximately $5.6 trillion of additional debt service costs for the US. To a great or lesser extent, the same would be true for other parties. For this reason, I expect the world is addicted to low-interest financing, and this habit will not be easily kicked.

GlobeSt.com: What have you learned through holding this contest year after year?

Voorhees: I’ve learned that our clients – or at least those that participate in the Pin the Yield on the Treasury™ contest – are at least as accurate as the pundits in predicting whether or not interest rates will move higher. The contest always leads to great conversations about the overall investment market. The information underlying a participant’s 10YT estimate is more telling than the actual prediction.

GlobeSt.com: Any other predictions or market assessments that you would like to share?

Voorhees: We expect this could be a record transaction volume year for retail in the Western US (our team’s market area, the states of CA, WA, OR, AZ, NV and HI), perhaps nationally. 2016 felt like the year where “something was changing” in the marketplace. Volume was tepid in 2017 as sellers tested new pricing. 2018 feels like the year transactions get done. The 50+ bps increase in the 10YT year-to-date served to spur investors to action. There seems to be ample inventory for buyers of all sorts, from the least sophisticated private investor to the most astute institutional capital, and sellers seem eager to meet the market. Simultaneously, it’s an excellent time to be a seller of high-quality retail assets at or near record pricing, and it remains a historic opportunity to acquire established retail properties at a wide cap rate to 10YT spread, producing excellent leveraged returns, particularly at modest LTV levels.