10-Year Treasury Notes
The yield on a 10-year Treasury note is at 4.62% or 2.78% or 5.51%. Great. But what does that mean? This post will try to make some sense out of what that indicates and what that might mean for the real estate market.
Treasury notes (T-notes) are reliable; they are predictable. T-Notes are fixed rate securities with a duration lasting between 2 and 10 years. They feature less risk and, as a result, have less chance of a higher payoff compared to stocks or other assets. Metaphorically, they are the wise dependable grandfather who rarely shows emotion. However, even a slight display of emotion can mean much more than what appears on the surface. So, too, with a 10-year Treasury note. The T-note’s yield can be used as an index of mortgage rates and as an indicator of consumer confidence.
Let’s say consumer confidence in the economy is high. Economic confidence suggests that investors may find better, more lucrative options in assets other than notes or bonds. Treasury notes will respond with low prices and high yields, making it a competitive option for investors whose optimistic instincts suggest finding other assets. Low economic confidence typically causes investors to seek assurance and safety--a prime time to seek government-backed, fixed rate notes. Accordingly, in these times, note prices rise and yields lower to adjust to the increased demand. The yield of the 10-year can serve as a litmus test for consumer confidence.
10-Year Treasury Notes and Interest Rates
Mortgage rates are dependent upon inflation, supply and demand in the housing market, the state of the economy, and a host of other factors. Tied to one another are fixed interest rates and the 10-year Treasury yield; lenders of fixed rate loans will tie the loan rate to the 10-year. While this rate varies from lender to lender and also varies for the type of property being financed (single family v. multifamily), the 10-year Treasury rate is used as a reference point, one that is lower than the mortgage rate.
A look at now
As of the writing of this post, the yield on a 10-year Treasury note is 4.62%. To put into near-term context, this is up from 3.86% at the start of 2024. While not a major spike, this trend can indicate more (just like the metaphorical grandfather’s subtle grin). This trend in rising yields, combined with--or perhaps because of--wage growth and a sticky inflation that hovers below 3% but does not get to the Federal Reserve’s 2% target--means the bond rates will likely remain in the coming months. And so will higher mortgage rates, putting many real estate deals on hold for more favorable financing.
The deliberation on deals applies across the board from single family to multifamily housing, from owner-occupied to tenant-occupied housing. Prospective buyers of single family homes can allot only a portion of their disposable income for housing. Increased mortgage rates mean increased payments, which mean decreased buying power. Multifamily deals face a dilemma of profitability. When NOI--which is independent of interest rates-- remains constant, more cash flow is needed to service the debt. With dwindling projections of cash flow, few deals pencil out.
