But it would be a mistake to say that there is nothing to worry about. The most enduring trend in finance for almost 40 years has been the decline in bond yields. Significant deviations from the model resulted in a sort of “financial crash,” observed Bloomberg columnist John Authers. A surge in yields in 1987 caused the stock market to collapse by 22% in a single day. In 1994, Orange County, California collapsed into bankruptcy. In 2007, the real estate market collapsed. And at the end of 2018, the stock market took an almost forgotten hit.
Either way, bond yields calmed down after the Federal Reserve assured markets that it would do everything in its power to keep interest rates low.
The difference now is that inflation is driving everything from New York City housing to Chesapeake Bay crabmeat, which has unfortunately tripled in price. If the Fed concludes that inflationary pressures are not temporary, it will raise short-term rates, the yield on 10-year bonds will rise, and it will become painful for any commercial, government, or consumer borrower with a lot of short-term borrowing. or floating. debt rate.
Business owners could be particularly vulnerable as they fund operations primarily with borrowed money. SL Green Realty said in its annual report that a 1% rate hike would increase its annual interest expense by $ 35 million, a significant mouthful for a company that has paid out about $ 300 million in dividends to investors. ‘last year. Paramount Group is looking to refinance an $ 850 million mortgage on 1301 Sixth Ave. which bears an interest rate of 2.59% and matures in November.
Tech companies could also be affected. Etsy shares were down 7% in morning trading. The Brooklyn online retailer’s debt has more than doubled in the past year, to $ 2.3 billion. Peloton Interactive warned in its annual report last month that rising interest rates could dampen demand for exercise bikes that many buy with borrowed money. Its stock has fallen 23% since the end of August.
âReductions in consumer loans and the availability of consumer credit could limit the number of customers who can afford our products,â Peloton said.
It’s certainly possible that the bond market hiccups aren’t more perilous than the dozens of similar upsets we’ve seen over the years. The foundations of the New York economy – finance and real estate – could continue on their way. Again, in Shakespeare’s play of “the weak link,” a love potion made from a flower‘s the sap distorted people’s judgment, and they got lost in the woods.
There may be a lesson here for the market.