MacroResearchBoard

U.S. Bond Yields: Another Upleg Ahead? – February 26, 2024

A just published report reviewed our investment strategy and the mounting evidence that inflation in the developed world is proving sticky. In addition, the report updated our research on the U.S. commercial real estate market given renewed angst about falling prices and the related stresses impacting the banking system. The key points from our analysis were:

• CRE prices continue to decline.
• Commercial mortgage growth has been steady, but not booming.
• Bank exposure to CRE has been rising. Smaller regional banks are vulnerable, but large banks are not heavily exposed.
• Life insurers and ABS issuers are most exposed on the asset side, although ownership of much of these assets is ultimately households.
• CMBS spreads indicate limited concern among investors, in marked contrast with last year’s SVB scare.

In sum, there is material potential downside risk for CRE under any but a favorable economic backdrop; however, by itself, CRE does not represent a major systemic threat to the overall economy.