Trepp sees potential for Treasuries to drop below 3%

Trepp, a New York-based data analytics provider, thinks it is possible for the benchmark 10-year Treasury to drop below 3 percent if a widely anticipated economic downturn is short-lived. 

As of Wednesday afternoon, the yield on the 10-year Treasury was at 3.55 percent, with Manus Clancy, senior managing director, forecasting the possibility of a drop.  

“[The coming year] will see a recession – but the trough will be shallow,” Clancy said. “The economy will slow enough so that long-dated Treasury yields will continue to drop.” 

The firm also raised the question of an uptick in commercial mortgage-backed securities delinquencies, which stood at 3.04 percent at the end of December. CMBS delinquencies will top 4 percent by mid-2023 and will flirt with 5 percent by year-end, Clancy said.  

“Loans unable to be refinanced [will] push the number up steadily in 2023,” he added. “Negotiated loan extensions or modifications [will] keep the number from being higher. [The] conduit hotel and retail segment remain surprisingly resilient, but office and SASB markets underperform.” 

Depressed CMBS volume 

Rob Jordan, head of CMBS at Trepp, is anticipating depressed CMBS issuance in 2023. Last year’s volume finished out at around $100 million, with a roughly 30 percent drop expected in 2023. 

“Issuance of new CMBS products takes a decent amount of time to line up, as warehouse lines have gotten harder to come by, and bank balance sheets being more selective on all pockets of capital,” Jordan said. “CMBS issuance will likely struggle to gain footing in the nearer term.”

Further, it may take longer than the first six months of the year for borrowers and lenders to agree on pricing, valuations and leverage given the ongoing interest rate volatility.  

There is about $450 billion of commercial real estate loan maturities slated for 2023, with CMBS making up about $15 billion of that. It will be interesting to see which pockets of capital adjust the fastest to the new rate regime, Jordan added.  

Distressed sectors 

Meanwhile, another hot topic is the future of distressed office loans. Trepp has already seen more office loans missing their balloon dates, Clancy said.  

Maturity dates will come and go and office loans will reside in CMBS purgatory for months, negotiations will take considerable time, and ultimately many loans will be extended, Clancy added. 

“What will be interesting to watch will be the borrower’s behavior during the extension [period],” said Stephen Buschbom, a research director at Trepp. “Borrowers who question the long-term viability of their investments but want to extract every penny of return on their sunk cost have little reason to invest Capex or structure leases beyond what will benefit them for the duration of the loan since they stand to lose the building at the end of the balloon extension if things don’t break their way.” 

That could exacerbate some of the problems in the office market, Buschbom added, or at least extract more blood during its slow bleed. Overall, borrowers will be happy to lock in lower rates for longer and special servicers will rejoice. By year-end, there are billions in office CMBS loans sitting unresolved, he said.