Lower Rates Lead to Real Estate
Trade in Soda;
I recently added the long bond to the Soda Portfolio as evidence that inflation was calming enough to stabilise the bond market. Inflation may have been cooling for two years, but the bond market was still in the turbulence of the hikes of 2022. It seems 5% is enough for anyone these days, and with public deficits going out of fashion, government bonds may even honour their commitments.
The US (black) and the UK (blue) 30-year bond yields trade closely and are headed lower from 5%. China (purple), Europe (green), and Japan (red) have met at 2.3%. These moves mean different things in different places.
Global 30-Year Bond Yields
The UK and the US have seen inflation peaks, and their economies are still expanding, although faster in the US than in the UK. Europe and China are slowing, while Japan is reflating. We are expecting rate cuts in most major economies next year, but in Japan, hikes. Japan is finally seeing rising long-term inflation expectations, not because the economy is broken but because the currency has been too cheap. It is now rising, and I wouldn’t be surprised if the US, UK and Japan meet at 3% next year. But Europe and China will no doubt be lower, and with China’s yield below Japan’s, some believe China is headed for Japanification. That means it could face a lost decade.
If global inflation is lower, it is a good time to revisit property or commercial real estate because if inflation is under control, rates will come down, and that’s good news for the sector. Yet many believe property likes inflation because the rents rise. That is true, but vacancies also rise, along with borrowing costs. The sweet spot is a high demand for space combined with cheap borrowing.
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