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May oh May – Volatility Continues

By: Aline Capital’s Capital Market Team

The theme of 2025 continues to be volatility, or perhaps “Ready, Fire, Aim.”

May felt like it was no different. There are mixed views on the “Big Beautiful Bill”, Moody’s downgraded the U.S. credit rating, there was a poor Treasury auction, mixed consensus on the timing and amount of Fed rate cuts and tariffs are still in the headlines, daily. Being in the weeds and following daily market movement, it seems reasonable to be concerned. However, getting above the trees allows for perhaps a different perspective. Looking at the last 30 days and comparing that to the last 6 months, we see:

The VIX has dropped dramatically from its peak on April 8th, after Liberation Day.

6 Month Cboe Volatility Index®

–      Cboe

The end of May reading of 18.57 is not far from the 52-week low of 10.62. It’s considered to be in the “normal volatility range”, which is where we have been for a few weeks now. It appears the market is comfortable with Trump and his tweets and the headlines on U.S. fiscal responsibility, or lack thereof.

Looking at the 10-Year Treasury:

We’re at a lower 10-Year Treasury rate now than at the beginning of the year. That is interesting to see given the daily headlines. What is also noteworthy is the steepness of the yield curve. As we know, risk and return are correlated. Investors are typically compensated for duration risk, meaning longer term bonds have higher yields than shorter term bonds. Currently, there are ~50 bps of spread between the 2-Year Treasury and the 10-Year Treasury. That is very different than the inverted or flat yield curve we saw over recent years. For context, on January 1, the spread between the 2-Year T and the 10-Year T was about 25 bps, so it has certainly widened. Typically, a steeper yield curve means investors are expecting long term growth, or inflation, to pick up.

The bond market also absorbed a few headlines that gave some of us butterflies. First, Moody’s downgraded the U.S. credit rating on May 16. While the stock market had some jitters, the bond market wasn’t fazed. Though it made news, the headline turned out to be no big deal. Moody’s was the last of the rating Agencies to downgrade us, so it’s just following a trend. We’re still investment grade (and obviously the best), so what’s the big fuss?

More interestingly, there was weak demand for a $16B sale of 20-Year Treasury bonds on May 21st. You’ll note in the first chart above that the 10-Year T crossed 4.60% that day as the market panicked a little bit. Yields went up (meaning bond prices dropped) based on the lack of interest. This is interesting and stems from the market questioning fiscal responsibility from the US government. Elon Musk is questioning that fiscal responsibility, too…

That said, the markets settled from those events as Treasuries have recovered from recent highs. We seem to be stuck with 10-Year U.S. Treasury rates around 4.5%, which is where many commentators and economists believed we would be.

In other words, “We are where we are.”

The good news:

In light of the headlines, we have to remember that commercial real estate is an asset class amongst a wide range of alternative investments. And, when compared with commercial real estate in other counties, the US is still the best place to invest. While the headlines may not say that, it is key to remember. Additionally, from a market liquidity perspective, there is still a lot of capital getting out the door. Spreads are tight and lenders are flush. With the capitulation from sellers on pricing expectations, deals are being put together. What we are seeing in light of the current yield curve is a preference for 5- and 7-year money. It prices better which, generally speaking, allows for more proceeds. And, with the hope of rates coming in again, we’re structuring most deals with stepdown prepay in the hope that rates come in further to where we can take advantage of a better rate in the not too distant future.

Well located real estate in the Southeast is an attractive play. It does not seem that it will get any cheaper given the amount of folks moving here (simple supply and demand) and we think it’s better to get in now rather than later.

If you want our thoughts on how to structure the capital stack and what we are seeing in the market, please do not hesitate to reach out. We look forward to sharing our thoughts and solutions.