The historic events of the past week are best viewed as an aftershock – the most serious one yet – of the 2008-09 financial crisis. There is no shortage of economic variables that describe what is happening now, but arguably none are more encompassing than the yield on the 10-Year Treasury note. The yield fell to 2.47 percent on Thursday, the day that the Dow Jones Industrial Average cratered by 512 points. It rose slightly on Friday before plunging even further as of mid-day Monday.
10-year Treasury Yield
The irony is that in a market motivated by risk-aversion, investors continue to crowd into U.S. government debt, pushing the yield lower, even after Standard & Poor’s reduced its rating from AAA to AA+ with a negative outlook, in effect saying the debt now carries greater risk of default. The market's aversion to risk emanates from deteriorating economic conditions in the U.S. and Europe and from poor decision-making by policy makers – the debt ceiling debacle here and the inability of eurozone officials to effectively address solvency issues in some of its member countries, most recently Italy and Spain. This period of uncertainty may extend for several weeks or months as policymakers scramble to put effective solutions in place. Regarding commercial real estate, two broad observations are in order. First, investors across all asset classes are fleeing risk, and if the financial uncertainty persists, the same sentiment may become evident in commercial real estate. This means that debt and equity capital may focus with even more intensity on core assets in primary markets, which offer safety and liquidity relative to riskier properties and markets. Secondly, an economic downturn would erase some of the recent progress in the leasing markets.