10-year Treasury Yield, 2011

The yield on the 10-year Treasury note ended Friday at 1.93 percent, the lowest level since at least 1962 when the Treasury Department began publishing daily rates. The decline of approximately 150 basis points so far this year has been driven by fear that policymakers in Europe and the U.S. are unable to manage the overhang of sovereign debt, which threatens to destabilize the global banking system and tip the European and U.S. economies into recession. The bond market also is reacting to “Operation Twist,” the potential for the Federal Reserve to drive long-term rates even lower by selling shorter-term debt and using the proceeds to buy longer-term debt. Lower rates would encourage businesses to borrow and take on more risk, although the results are likely to be modest as long as business and consumer confidence remains depressed.

The Fed’s strategies to ease monetary policy have been likened to pushing on a string. Businesses are concerned about final demand and the opaque regulatory climate, and lower rates may not be enough to get them back in the game. In normal times, low Treasury rates are good for commercial real estate, encouraging lenders to ease terms and making property cash flows and REIT dividends look more compelling for investors. But this is the “new normal,” a period when ultra-low interest rates are a sign of fear as investors pile into low-risk Treasury debt, pushing yields to record lows. This heightened aversion to risk makes safer commercial real estate assets look appealing, especially apartments and higher-quality properties secured by long-term leases with no near-term rollover risk. But the uncertainty is not good for the overall commercial real estate market, which needs business confidence to generate leasing activity and fill vacant space.