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The 10-year yield this past week barely moved at all.  With that in mind, I thought I would get into a brief discussion on the near future direction of interest rates.

I had a conversation with a gentleman last week regarding the future direction of interest rates.  He is a bright guy and we had a quick, but interesting discussion.  I am sharing this with all as I suspect some of you have confusion in this area as well.

First, interest rates are affected by many factors that both push them up and pull them down.  All we all can do is make some sort of informed guesses on the direction going forward.  We have had historically low interest rates for a long time.  Even now they are still low, but many of us are spoiled by the recent past.

So, let’s get into a bit of Econ 101.  Most have heard that there is an inverse relationship between the price of bonds and interest rates. Simply put, as the price of bonds (e.g. the US 10-year) increase, then interest rates will decrease (e.g. the US 10-year yield).  And, the opposite is also true.

For many years, the FED bought bonds (i.e. increased the demand for bonds through Quantitative Easing) which in turn increased the price of bonds.  That led to downward pressure on interest rates for a very long time.  This stimulated the economy; and it also contributed to a nice run-up in stock and real estate prices.

Then the Fed stopped buying the bonds as they felt the economy was stimulated enough.  This was tricky for the FED as it was a bit like playing with fire.  They really just wanted to light the barbeque pit in the park versus igniting the whole park!

Now we are in the next stage of the FED experiment.  They are now selling bonds back to the market.  Again, from above, this provides more supply which reduces the price of bonds.  And, therefore, interest rates should rise.

None of this is perfect (hence why economics is more art than science).  Many other factors affect interest rates.  Remember, the ECB (the European FED to keep it simple) affects the German Bund yields which also affects the US 10-year yield.  However, at the moment, the odds of increased interest rates outweigh rates dropping.  Should the FED/ECB change their plans, then my own outlook could easily change.

Anyway, enough of this for one week.  I hope this proves helpful as you attempt to guess the upcoming market direction.

Investments Opportunities for Purchase with Strong Cash Flow:

Back on the January 15th update, I wrote about “Creating Residential Listings Using Commercial Opportunities.”  Each week,  I am presenting some of those investment opportunities to better educate all on what is actually available.  Note that these are all Single Tenant Net Leased properties that have listed in about the last 10 days.  In addition, I assumed a 5% loan with 50% down.  This is just a small sample of what is actually available (for a larger view, click here).

If you assume investors in the Bay Area are getting a cash flow of 3.5%, then you can see the potential improvement with these properties above.  This approach is great for the investors desiring increased cash flow, an opportunity to get out of daily property management, and/or taking the challenges of rent control off the table.  Should you wish to discuss any of these or others, then give me a call.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.

Articles of Interest:

The SJ Mercury News reported “Silicon Valley tech hiring outpaces rivals, but woes worsen.”

Reuters reported “Fed should lean on rate cuts, not QE, in next recession: paper.”

The SJ Mercury News also reported “Hidden cost of housing: How a shortage of construction workers is making our crisis worse.”

See the table below for approximate interest rates.
Type Rate Fixed Term
Apartments 4.450% – 5.095% 3 to 10 year (30 yr amortization)
Commercial 4.780% – 5.395% 3 to 10 year (25 yr amortization)
SBA Lending Call for Options Call for Options