For investors across all spectrums trying to determine when interest rates will change is a top priority.
A key element in our government’s strategy for economic recovery has been keeping rates at historic lows. The Federal Reserve has been clear for four years they would keep rates down until the economy showed signs of returning to more consistently robust levels. They stated 6% unemployment as a bench mark.
With the transition from Bernanke to Yellen, the clear statements from the Fed that they are winding down the QE II bond purchasing programs , and unemployment rates creeping toward that 6% figure, many in the investment world have been anticipating some signs that rates would rise.
The consensus of opinion among economic experts is that rising interest rates should be the logical outcome of The Fed’s tapering of QE. The Law of Supply and Demand dictates that if you reduce demand (less bond purchases by The Fed) there is now excess supply. In order to get the market back into equilibrium interest rates on bonds should increase to entice more buyers of bonds.
So why have interest rates not started to rise? Here are three reasons from articles I’ve read these past few weeks
- Flight to quality due to the crisis in Ukraine. Whenever there is a crisis in the world people transfer their money from riskier investments into safer investments. Nothing is safer than U.S. treasuries.
- Investors are moving money out of the stock market back into bonds. Last year the stock market rose 30 percent. Investors are beginning to be concerned that the stock market has peaked and it’s best to take the gains and park their money in bonds, at least temporarily.
- U.S. economy has rebounded faster this year than was predicted which has led to higher tax revenues. This has reduced the amount of U.S. debt issuance from $680 billion to $492 billion, a 28% decline!
No matter what the reasons are for the lower interest rates this can only be considered good news for commercial real estate. The days of very attractive interest rates we’ve come to expect are continuing for the foreseeable future.
