VNQ - VNQ: How Falling Interest Rates Would Impact REITs

2024-07-12 14:23:14 ET

Summary

• Market consensus predicts a 70% chance of a 25 basis point rate cut in September and two cuts by December.
• Falling interest rates could benefit REITs through cap rate decline, transaction volume increase, cost of capital reduction, multiple expansion, and M&A stimulation.
• Discounted preferreds and REITs with moderate to high leverage with strong businesses may be best positioned to take advantage of falling interest rates.

I think it is quite difficult to have an advantage in predicting the Fed’s actions. Thousands of analysts are looking at it, and we all have access to the same information. So, while I have my own opinions on if/when the Fed will cut, it is perhaps just as useful to know what the market collectively thinks will happen.

Using pricing on futures, one can calculate the market implied probability of rate cuts. As of 7/9/24, the market thinks there is a 70% chance of one 25 basis point cut in September from the current range of 525-550 down to 500-525....

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