Yield Curve Inverts – Good News or Bad News for Property Investors?
As property investors interest rates are our life and blood.
Something major happened this week in the world of finance, the yield curve inverted. The US Federal Reserve has essentially given up on raising the fed funds rate any further in 2019. This will effect the entire world as interest rates fall or rise in unison. An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.
This is a very “dovish” move by the US Fed, signaling easy monetary policy in the future. While markets may view this as a positive in the short term, property investors should be on guard.
We have had 10 years of never seen before low interest rates. At some time in the future, the punch bowl spiked with 100% alcohol will be taken away. The US Fed has tried to signal more aggressive rate increases ( 3% on the 10 year bonds), only to back down on the increases when the time comes. On Friday, March 22, the yield curve inverted. This means that the yield on the three-month treasury was higher than the 10-year treasury. This is a sign that investors are becoming very risk-averse. They believe the prospect for generating strong returns on longer term investments is weak. It would be extremely rare for the yield curve to invert without a recession following within a couple years. Add in the Brexit fear game….interesting times…and probably times to be cautious and lock in long term capital repayment terms.
The US Fed’s “rate hikes” thus far have not even gotten back to what would historically be considered low rates. Who can remember 6% to 8%….there is a new generation of property investors who have never seen these rates let alone crazy rates of mid teens.
Historically we are in a recession for a few months before economists even realise it. Using the word historically, I would believe markets will adjust. Interest rates will head back to zero as investors flee to safety. Cap rates will trend upward while stocks decline on the order of 50 percent—give or take. Family home prices will start to come down, albeit in a more orderly and tame fashion. It won’t be like last time, because lending practices are less ridiculous this time around.
My opinion is to lock in low rates…buy solid deals….raise cash….
Be prepared for the eventuality.
Recent Comments