Behind the curve. The third estimate of First Quarter GDP growth was 3.1% but the Federal Reserve Bank of Atlanta projects Second Quarter GDP growth to drop sharply to 1.6%. According to the Bureau of Labor Statistics, changes in total nonfarm payroll in the past three months were 216,000, 72,000 and 224,000, respectively, an average of 170,667 and a deceleration from 209,750 for the 12 months prior. Due to the slowing GDP and job growth (albeit, both still positive), the long end of the yield curve continued to decline as the yield on the 10-Year Treasury Note dropped from 2.414% on March 31 to 2.000% on June 30; the spread between the 3 Month Treasury Bill and the 10 Year Treasury Note (“3M-10Yr”) inverted in Second Quarter from 1 bps to -9 bps (the 3M-10Yr spread was negative for the entire month of June).
Central bank tightening moved from the back burner to the kitchen sink during Second Quarter, with monetary policy stimulus now served on investors’ plate of expectations. A “lower for longer” interest rate environment is typically positive for property securities, given the capital intensive nature of the business (i.e., need to raise/refinance debt) and correlation with capitalization rates (i.e., lower debt costs drive valuations higher). Yet the reasons for the interest rate U-turn have been more inauspicious (e.g., ongoing trade wars, potential real wars, muted inflation and slowing economic growth), which helped put a lid on property returns during Second Quarter; particularly after posting the strongest quarterly returns in nearly a decade the prior quarter. While US investors debate the merits of yield curve inversion-induced recession, it is worth noting that global government bond yields (ex-US) are at all-time lows. Negative yielding sovereign assets stand at a record $11.5 trillion, topping 2016 peak levels, including 85% of government bonds in Germany and 70% in Japan. Yields are positive across the entire maturity spectrum only in the US and UK, albeit the yield curve is inverted in both countries. Yet the US 10-year Treasury yield continues to fall, down 40 basis points (bps) in Second Quarter to 2.01%, which compares to 2.69% at the beginning of 2019. Global property securities should remain attractive in the current low/falling rate environment, particularly given premium/growing cash flows that REITs can provide in a world increasingly starved for yield.