Time To Lock In Fixed-Rate? 10-Year Rates To Rise To 2%, BlackRock Managing Director Says

After a year of record lows, the yield on 10-year Treasury notes, a widely used proxy for interest rates, has been ticking upward since the summer. But with a decline over the last two weeks, commercial real estate borrowers are facing a choice: lock in low interest rates on debt now or opt for a floating rate, which could pay off if interest rates stay generally low or continue to fall.

Although Federal Reserve Chairman Jerome Powell said that agency plans to keep interest rates low for a long time, the current environment may be as good as borrowers can get. 

On the Walker Webcast, BlackRock Managing Director Kate Moore said she expects the 10-year yield to hit 2% by the end of 2021, up from its current levels, which are hovering around 1.6%.

“If I were financing an asset and choosing between floating or fixed right now, I would choose fixed,” said Moore, whose responsibilities for BlackRock include identifying opportunities to exploit structural change, policy evolution and dislocations across global industries. “I can’t give you the exact path it takes along the way, but I think the 10-year trends to 2% by year-end.”

The rise in Treasury yields and interest rates is likely going to be a product of growing investor confidence in a widespread economic recovery. But while Moore said she expects most industries to recover in the long term, she told Walker & Dunlop CEO Willy Walker that some verticals may make better short-term rather than midterm bets. 

Earnings for cyclical industries, such as energy, banking, manufacturing and raw materials, are likely to spike as the global economy revs up and requires excess production to make up for lost time during the coronavirus pandemic. Moore pointed to these industries’ earnings revision ratios, a measure that relates the number of times companies in a sector have downgraded their earnings expectations versus upgrading them. As pent-up demand has set in, these companies have been on a record-setting hot streak by the metric of earnings revisions. But despite the positive signs, these sorts of industries are not the ones that have made their way into Moore’s current portfolio mix.

“It’s not that these companies will be doing poorly in six months,” Moore said. “But the kinds of gains we’re seeing now are unlikely to be replicated. People are going to focus on more durable, sustainable cash flows, which will favor some of the tech trades.”

Technologies that help companies protect their data — and the data of remote workforces — are among the investments that excite Moore the most, she said, adding that she expects spending on cybersecurity software to grow long past the end of the pandemic, even if work resumes in a more in-person form. 

Inflation could also force more investment into technology. As prices rise around them, service companies will be forced either to pass along those increased costs to their own customers or invest in technologies that streamline their operations, Moore said. And with labor prices not budging despite high unemployment, labor-saving technologies could be primed for more growth. 

Consumer spending is likely to be an engine of growth for the economy in the next year too. While it is true that Americans are currently holding onto more cash than at almost any time in decades, much of that new depository wealth has gone to the upper quintiles of the nation’s earners, Moore said. Luxury goods and services, from spending on homes to vacations, are likely to see a rise. 

But Moore also suggested that investors should not underestimate the impact of stimulus payments and benefits for lower-income Americans. A forthcoming American Families Plan from the Biden administration could also put more money in those earners’ pockets, providing a boon for local retailers.

“Not only do you have this 40%, who are flush with cash, who have a huge amount of pent-up spending on goods and services that they want when they’re vaccinated and the economy reopens, but you also have a lower-income cohort that is going to have continued government support,” Moore said. “I think you’re going to get the consumer firing on two really strong engines.”

On April 28, Walker will host Jim Loehr, co-founder of Johnson & Johnson Human Performance Institute. Register here for the event.

This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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