Now What’s Happening With the 10-Year Treasury?

At the end of September, there was the question of what was happening with the 10-year Treasury. A couple of weeks later of volatility and second-guessing the Federal Reserve and the question is front and center again.

More realistically, it never went away except in the minds of traders and economists who might have thought everything was straightened out and a soft economic landing was just around the corner.

But things have been going back and forth for a long time. Two groups of Treasurys and how they interact with commercial real estate financing. The 10-year yield affects longer-term mortgages because it acts as the risk-free investment available to lenders and investors. Short-term instruments, from the two-year and down to monthlies, are risk-free comparisons for CRE financing like bridge and construction loans.

In December 2023, CRED iQ did a deep-dive analysis of about $210 billion in commercial mortgage maturity expected in 2024 and another $111 billion in 2025 for a total of $321 billion. About $100 billion — close to a third — originated in 2014 or 2015 as 10-year loans.

In 2014, the average yield of 10-year Treasurys was 2.54%, based on a GlobeSt.com analysis of Treasury Department data. The following year it was 2.14%. Rates plunged because of the global financial crisis. The next few years ran as follows: 2016, 1.84%; 2017, 2.33%; 2018, 2.91%; 2019, 2.14%; 2020, 0.89%; 2021, 1.45%; and 2022, 2.95%.

As new longer-term mortgages were set, for years the risk-free 10-year yield was far lower than today, setting up a future of 10-year comparisons that are far lower than they’ve been of late.

This suggests a strong possibility of ongoing maturity financing problems unless borrowers either raise enough capital to satisfy the mortgage at maturity or can refinance. But as the 10-year runs higher, so do longer-term mortgages. “A lot of real estate loans put into place a few years ago now have to refinance much higher or extend for another year at somewhat a higher rate,” said Jennifer Siegel, managing director at Derivative Logic.

So, where will the 10-year go? It’s hard to say. The 10-year yield closed at 4.04% on Tuesday, October 8. The so-called forward curves for the rates start there, swing down to 3.95% by February 2025, and then reach 4% by September 2025 and continue to rise, hitting 4.5% by 2030.

“The market got really ahead of itself on what the Fed would do in terms of rate cuts,” Siegel told GlobeSt.com. “We’re in a slightly different environment. The Fed has raised rates. They’re trying to keep inflation in check, but there’s also the idea from a lot of people who own assets that rates were so much lower. Those people aren’t as affected by the Fed’s movement.”

But market-based projections are often wrong. There are so many factors in motion that trying to accurately predict the movement of the 10-year is really tough. In the short term, Siegel says forget about a 50-basis-point cut in what the Fed does immediately.

“It’s very vulnerable to shocks,” she says. “It feels to me like we’re at this moment where there’s a lot floating around and it’s wait and see.”