31 May 2019

Executive Summary

  • The 10-year Treasury has fallen almost 100 bps from its November 2018 high and stands at 2.16% as of this morning.
  • The yield curve has once again inverted (it briefly inverted in March) with the 10-year now below the 3-month Treasury at its widest level since 2007.
  • Our April MarketFlash explained why a yield curve inversion does not necessarily indicate that a recession is imminent and we stand by that assessment today.
  • The yield curve has inverted because of worries about global trade, exacerbated by the intensified U.S.-China trade dispute and today’s announcement that the U.S. may impose a 5% tariff on Mexican imports next month. Despite reasonable momentum in the global economy right now, stock market volatility due to weaker sentiment has increased the Wall Street odds of one or two Fed interest rate reductions in 2019.
  • The CBRE house view remains that we will have solid GDP growth of 2.4% this year and that the next downturn will not occur before 2021 even though downside risks have increased.
  • The inverted yield curve creates opportunity for borrowers to take on longer-term debt or to swap out floating-rate for fixed-rate loans.

This second yield curve inversion in 2019 flashes a historic warning sign to investors who are concerned that we are nearing an economic downturn. While yield curve inversion has been a reliable leading indicator of most prior recessions, it does not in itself cause one. We remain optimistic that the current economic expansion will continue through 2021 and that 2019 will be a year of solid economic growth despite recent events causing downside risks to increase.

CBRE’s house view remains that we will have a good 2019 with GDP growth of 2.4%, a slower 2020 and a downturn or possible recession in 2021. Globally, consumer confidence is high, there is solid economic momentum in most of the major economies, China and Europe have increased the level of economic stimulus and, because inflation is weak, there is ample scope for the Fed to cut interest rates. This will lead to a period of stable cap rates with only modest increases for fundamental weakness (slowing rent growth), but not for capital markets distress (rising interest rates).

As is the case of the brief yield curve inversion in March, we see a debt capital markets opportunity and would expect borrowers to shift the time duration of their borrowing to take advantage of the loss of arbitrage on shorter-term rates and more strategic use of I/O (interest only loans), keeping the overall current yield down. We also likely will see more interest rate floors and, if the volatility persists, some spread expansion from lenders.

From a macro perspective, while we anticipate a resolution of the U.S.-China trade dispute and a “soft” Brexit, the odds of no-deal outcomes have increased. So long as the U.S. stock market and jobs market stay strong, we likely will see the U.S.-China trade dispute continue for a while, as President Trump perceives he has negotiating leverage. The ongoing trade war means we likely will see bouts of intense uncertainty and lower interest rates though possibly higher spreads.

The U.S. economy has been remarkably resilient in jobs and GDP growth when it has faced even greater shocks and has consistently outperformed Wall Street and Fed expectations. Although 2019 will be weaker than 2018, we still see a year of solid economic growth despite near-term trade worries.

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