New Treasuries Could Lower The Cost Of Borrowing For Real Estate

The Real Estate Espresso Podcast

New Treasuries Could Lower The Cost Of Borrowing For Real Estate

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New Treasuries Could Lower The Cost Of Borrowing For Real Estate

Welcome to The Real Estate Espresso podcast, your morning shot of what is new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about how real estate investors were highly attuned to what was happening in the bond market.

The key benchmark figure for us is the yield on the 10-year treasury. If the yield goes up, then the cost of borrowing goes up as well. A simple example of that is a recent consumer price index report, which came out and surprised the entire marketplace with a jump in the inflation metrics. The assumption is that this will force the Federal Reserve to hold its benchmark interest rate higher for longer. In fact, the 10-year treasury jumped almost 20 basis points in the span of a couple of days.

Now, future weakness in the employment numbers could counterbalance the inflation numbers, potentially push interest rates lower, but that hasn’t happened yet. We expect the Census Bureau’s adjustment of the employment numbers to come out later this month which could result in a significant downward adjustment to employment numbers, much as it did last year when more than 800,000 jobs were adjusted out of the employment numbers in a single day.

Behind The Scenes happenings

I’m going to draw your attention to some policy work that was made public by folks that are closely connected with the new administration in Washington. I was first alerted to this thanks to the work of Jim Bianco, who was a recent guest on the MacroVoices. The negotiations with NATO members are heating up with the U.S. President making it clear that he expects NATO countries to step up and meet the requisite commitments of 2 percent of GDP under the NATO Treaty. So far, the US has been spending far in excess of their share and has not been demanding payment from other NATO members.

I believe the new administration will find ways to fund the military expenditures of the U.S. military with external funding. It’s not going to be direct payments to the military from foreign countries. The largest problem in the US is the ballooning national debt at nearly $36 trillion and counting. The tax receipts of the U.S. government bring in about $4.5 trillion a year.

Tariffs might increase that amount and an economic downturn could also reduce those tax receipts. In particular, the amount of capital gains tax collected could drop if we had a stock market correction, which would result in a further reduction in income tax receipts. The path to reducing the deficit and the debt requires a reduction in expenditures, an increase in revenue, and a reduction in the cost of servicing the debt. I’m not even going to get into the unfunded liabilities from entitlement programs.

So, let’s look at what’s been happening behind the scenes. You’ve got a new player, Stephen Mirren, who was in the Treasury Department under Stephen Mnuchan right at the end of the first Trump administration. Then he moved on to Wall Street, onto Hudson Bay Capital, and now he’s been appointed to the Council of Economic Advisors under the second presidency.

In November, he wrote a piece about global trade. Then he wrote another piece about dealing with all of those issues. The fingerprints in this report mirror much of what Zoltan Pozsar has written and if you might remember, Zoltan Pozsar used to work for the Federal Reserve and then for Credit Suisse. Both of these folks have the ear of Scott Besant, the new Treasury Secretary. Scott Besant has been giving policy speeches going back more than a year that sound very similar to what they’re saying. Some of what they’re offering is very consistent with what President Trump has been discussing.

These players are talking about a three-pronged approach. Firstly, it’s about tariffs. That’s about bringing in revenue from imports and that’s what’s making all of the headlines. The second is the Sovereign Wealth Fund which we talked about a few days ago on the show. This is something that is really focused on monetizing the assets of the U.S. Federal Government. For example, the US owns about 8 tons of gold. It’s valued on the books at $42 an oz. Today, gold is priced at over $2,900 an oz. If you took that 8 tons of gold and revalued it from $42 to $2,900 an oz, that’s somewhere between 8 to 900 billion dollars worth of assets.

New Treasury Bonds

The third part of the program, which is the most controversial, it’s also the least discussed, is about global trade and in the 80 years since the Second World War, the security arrangement the U.S. has for the rest of the world. The U.S. Navy has been patrolling the seas and has allowed for free trade to occur around the world. The U.S. has been paying for that out of its own pocket and no bill has gone to any other country.

Well, Trump has been railing against that security arrangement, saying that all of these countries are getting a free ride at the expense of the United States. The most recent speeches are demanding that NATO countries spend up to 5% of their GDP, significantly above the 2% commitment that is required under the NATO treaty. Of course, 5% is a negotiating tactic, as a lot of these countries are spending 1.1 or 1.2% of their gross domestic product on defence.

There’s another possibility that’s not getting any airplay. This is where the debt could come into play. The U.S. Government would potentially issue a new form of bond, a new treasury, that would have a zero yield, and those foreign countries, in exchange for having the U.S. cover their shortfall, would fund the U.S. debt liabilities at zero yield. That would have the benefit of lowering the cost of servicing the U.S. debt significantly and it would provide a quid pro quo, enabling the U.S. to continue to provide that military protection for all of the free world while reducing the cost of servicing the ballooning U.S. deficit.

Implication for Real Estate Investors

If we now have a large proportion of the U.S. debt being purchased by foreign governments bonds at zero yield, the U.S. government doesn’t need to issue as many T-Bills, U.S. Treasury’s 5, 10, 30 year treasuries. But, the global demand for those treasuries may in fact remain the same, at least in the private markets. That could have the effect of also pushing the yield down for all of those T-Bills and the U.S. Treasury’s. That would lower the cost of debt for real estate investors.

So we as real estate investors might be ignoring all of this discussion about what’s going on with negotiations with NATO, but quite frankly, this could play a significant role in reducing the cost of borrowing for real estate investors, if it plays out the way I expect it to from all of the behind the scenes movements that I’m seeing.

Something to pay attention to, put it on your radar and as you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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