Commercial real estate investors pay close attention to a few dynamics and elements in the overall economy. While the local microeconomy is very important, the macroeconomy does play a sizable role. Meaning, how the United States national economy performs does have a real and direct impact on how local investment assets perform. In other words, if the US economy is strong, local investments, such as real estate, will do well. (Of course, the converse holds true, as well.) So, let’s take a quick look at the importance of the 10-year treasury bond.
The 10-Year Treasury Bond Explained
The 10-year treasury bond is a debt instrument issued by the government of the United States. As its name implies, it matures in ten years. Over the course of that time, investors holding 10-year treasury notes, earn yields. Essentially, like typical loan interest.
The importance of the ten-year treasury bond yield goes beyond just understanding the return on investment for the security. … When confidence is high, the ten-year treasury bond’s price drops and yields go higher because investors feel they can find higher returning investments and do not feel they need to play it safe. —Investopedia.com
The particular bond, which is sold via auction by the U.S. government, can also be obtained indirectly through banks. And, much like other types of investments, commercial property investors, follow its trends because it serves as a proxy indicator for things like mortgage rates. Put another way, as the 10-year treasury bond goes, so goes mortgage rates.
Why the 10-Year Treasury Bond is So Important
So, why exactly is the 10-year treasury bond so important to commercial property investors? Well, the answer is that it acts as a strong indicator of how the macroeconomy will move in the short-term. The 10-year note price is determined by four factors: the face value, the dollar price, interest rate, and yield.
Face value, also referred to as “par,” is the price the government agrees to pay out at maturity. The dollar price is the amount paid for the bond, relative to its face value. The interest rate is the amount of interest paid over the life of the note. And, the yield, is a combination of the dollar price and the interest rate.
The 10-year treasury bond’s performance, as mentioned above, is a strong indicator of how the U.S. economy is currently performing and is forecast to perform in the future. Which means, since the 10-year note is a proxy for mortgage interest rates, that’s a very important metric to commercial property investors. After all, if mortgage interests rates rise, the long-term cost of buying commercial property goes up. Meaning the ROI might shrink. However, if the forecast is for mortgage rates to fall, then commercial property investments become more lucrative over the long-term.
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