Bill Ackman Predicts Rising Treasury Yields. How Will CRE Fare?

The Treasury Department continues its issuance of notes to bring in cash it technically needs to pay bills, including debt service on past borrowing (regardless of modern monetary theory, politicians aren’t enabling money creation with the hope that inflation won’t recur).

In the process, Pershing Square Capital Management founder and CEO Bill Ackman said on Twitter that his firm is shorting the 30-year Treasury. “When you couple new issuance with QT [quantitative tightening, in which the Federal Reserve does not keep buying bonds], it is hard to imagine how the market absorbs such a large increase in supply without materially higher rates,” he wrote on Thursday.

If he is right, yields would go up and prices down because of an imbalance in supply of longer-term bonds and demand for them. But what does that mean for commercial real estate borrowing rates? Maybe not a lot.

“Given that commercial real estate borrowing costs are more correlated to the 10-year than the 30-year, we don’t expect 30-year repricing to be very impactful to CRE values,” Geordie Hebard, an investment professional at Arkhouse, tells GlobeSt.com.

It’s good to remember that when someone publicly announces an investment tactic, they might have an agenda for doing so, as Andrew Thornfeldt, a managing director for investment banking at Chatham Financial, tells GlobeSt.com. However, some of the same arguments could be made for the 10-year. “The 10-year Treasury is up 10 basis points over yesterday, and it was up yesterday as well,” he says.

What that means isn’t necessarily clear. “A year ago, we thought the 10-year yield was at a strangely low level,” says Hebard. “But now, it’s more reasonable relative to inflation.” Arkhouse has used a short on 10-year Treasury notes as a hedge against its real estate investments.

Then again, Thornfeldt points to the problem of volatility in the 10-year. “It does have an impact in the structured markets,” he says. “CMBS specifically will continue to struggle. One of the reasons we’ve seen trouble in the structured market is because bond investors have been scared away by the volatility. You have big bond buyers less willing to buy big positions despite credit spread.”

In the world of floating rates, it may not matter so much. “The world I play in, it’s more tied to SOFRA,” John Vavas, a commercial real estate finance attorney at law firm Polsinelli, tells GlobeSt.com. “Most of my clients are SOFR-based lenders using floating rate. In my mind, there are far fewer fixed rate mortgages.” So, many for many CRE professionals it won’t matter.

A major reason for the many takes, besides the global shortage of reliable crystal balls, is the complexity of the market. “This is a complex question because it requires a dynamic answer that considers numerous variables with constantly evolving weightings,” RRA Capital CEO Boots Dunlap tells GlobeSt.com. He says capital for today’s loans was allocated at least a year ago, “with a singular mandate of providing loans, irrespective to relative returns,” so generally difficult to re-allocate.

And loans are illiquid, which means poor ability to mark to market, so lenders have a “stronger bias to recent rate history.”