Part of the yield curve has inverted, and this has been all over the financial markets headlines in the last few days.

In this week's Capital Markets Report podcast, The Thirty Capital team takes a look at this and what it means for commercial real estate borrowers.

Explains Analyst Jason Kelley, the curve is "Continuing to get more and more flat. There's really no difference between a Five-year and a Ten-year treasury . . . about one basis point (bps) difference." 

Meanwhile, the Two-year continues to creep up. In the last year, it has moved up more than 186 bps, compared to the Ten-year's increase of 52 in the same time period.

What do commercial real estate borrowers need to know?

Thirty Capital CEO Rob Finlay says commercial real estate borrowers need to remain aware that rates have winded out and spreads have winded out as the capital markets are repricing loans and other products in the space.

"From an underwriting perspective, make sure you widen out a little bit and be a little bit more conservative with your pricing assumptions," Rob cautions.

Market thinks the Fed's getting it wrong

There were a few days last week where the curve went inverted for intraday trading, with shorter yields passing the long-term yields.

What's happening now is a continuation of the same story we've had for a while. Jason explains that "The market's thinking the Fed's going to get it wrong; that the Feds will force rates up, force a bit of a recession, and then they're going to have to backtrack."

Inflation is real, not transitory

Rob agrees with Jason, saying: "There's no way to do a soft landing here. I think it's a fantasy world to think that this inflation is just transitory and not real."

Thirty Capital Analyst Jeff Lee cautions that the inflation numbers from last week don't account for the Ukraine situation, so consumers can expect eight points or more in the next inflation numbers.

What's a commercial real estate borrower to do?

Jeff says his team is closely watching a lot of deals in progress right now. Many of them have to be repriced or re-traded and investors are getting double whacked from spreads in the Ten-year.

Only a couple weeks ago, Jeff talked about spreads widening by around 40, 50, 60 bps. That, along with the increase in the Ten-year, means a borrower could be looking at 150 basis points from where they were a month or two ago

Rob says that borrowers should look at the current situation and see that long-term is the way to go. "For the most part, short term debt is off the table.

"Even where the capital markets have widened out a little bit, long-term is still a pretty smart play."

No end to the volatility just yet

Market volatility is expected to increase for the next six months or so as the Fed marches ahead with rate increases.

"Until they indicate that they are going to pause, we're going to continue with this volatile correction," Jason notes.

Listen to the full episode for the team's complete analysis and guidance on how commercial real estate borrowers should be responding to today's market conditions.