Federal Reserve raises rates as debt markets face rising refinancing risks 

The Federal Reserve Bank increased interest rates by 25 basis points on May 3, a widely anticipated move that came with the caveat that the US central bank will take a wait-and-see approach to future rate increases. 

Market participants who spoke to Real Estate Capital USA are hoping the latest round of increases will provide some stability for key benchmarks and credit spreads, particularly as lenders and borrowers are looking at a more than $400 billion maturity wall this year.  

Rates are now in a range of 5-5.25 percent, the highest level seen since 2007. 

Marcia Kaufman, chief executive of Bayport Funding, a Great Neck Plaza, New York-based mortgage lender, believes it is possible the latest metrics around inflation could lead the Federal Reserve to take a less hawkish stance. 

“We are cautiously optimistic that the Fed may pause rate hikes provided the data reflects abated inflation. However, while benchmark rates may potentially decrease, recessionary concerns may serve to increase credit spreads and overall lending activity,” Kaufman told Real Estate Capital USA. 

The CPI index, a key inflation marker, showed a decline in April. At the same time, the benchmark 10-year Treasury has also been more stable and trading in a narrower range over the past three to four weeks. Still, the yield curve remains inverted as investors remain concerned about myriad short-term risks.  

The two-year Treasury was at 4 percent as of the end of the day on Wednesday, with the benchmark 10-year Treasury at 3.53 percent during the same period and the 30-year Treasury at 3.65 percent.  

“We have witnessed some rate compressions across the Treasury bond market, but the inverted yield curve continues to reflect overall market concerns,” Kaufman said. “Thirty-year rates versus short terms reflect overall economic concerns. In addition, we continue to monitor price indices, global events like the situations in Ukraine, Russia, Sudan, China and potential domestic political discord.” 

Jonathan Gray, Blackstone’s chief operating officer, outlined a slightly different scenario. “The Fed is likely to pause or maybe go 25 basis points higher from there, but I think they’re unlikely to pivot as quickly as the market is expecting,” he told the Financial Times last week. 

Charles Stucke, chief investment officer of Subtext and co-founder and chief investment officer of Subtext Investment Management Company, said the market is still hobbled by uncertainty.  

“The uncertainty of the present and the refinancing risks awaiting next year are tempering investor and bank sentiment in the real estate sector,” Stucke said. “Year to date, banks have been rationalizing the loans they are extending and their client lists. This should continue at least through the summer.” 

But there is a shift that is now starting to be seen, Stucke said. “Investors, on the other hand, are beginning to look through the cycle at opportunity.  In this market, banks want to bet on quality assets, more stable property types, and quality clients,” he added. 

Zachary Streit, founder and managing partner of WAY Capital, said it is clear Federal Reserve chair Jerome Powell is sticking to his guns on fighting inflation. In its comments, the Federal Open Market Committee remains set on a scenario in which inflation returns to 2 percent. Additionally, Federal Reserve chair Jerome Powell said the bank will consider the idea of a pause at its June meeting and noted that lowering rates is not in its forecast. 

“One upshot of the hike, in conjunction with regional bank volatility, is that it’s an ever more challenging capital markets [environment] where it’s getting harder to get deals done every day,” Streit said. “There are still quality deals to be done and financing to be had, if you have the structured finance experience and relationships to weather a difficult period.” 

But there is the potential for lower rates later this year, Streit added. “We have been highlighting and incorporating the forward-looking curve which suggests a steep decline in rates later this year and next year,” he explained.  

Powell fired one last shot in his commentary, underscoring that raising the US debt ceiling is essential for the US economy. “It is very important that this be done,” he said. “We shouldn’t even be talking about a world in which the US doesn’t pay its bills.”