High National Debt Is Bad for CRE

By Erik Sherman

The federal debt is a huge number at $36 trillion. That has major implications for the government and the economy. Debt numbers this large automatically send out ripples the size of tsunamis. Some of them could wash over long-term Treasury yields and then flood the cost of commercial real estate capital.
The figure is the accumulation of decades of deficit spending when outlays are larger than receipts. In recent times, some of the bigger drivers of deficit spending have been the Tax Cuts and Jobs Act of 2017, the emergency aid packages during the pandemic, and additional stimulus and large works bills.
To float deficit spending, the government issues Treasury marketing securities such as bonds (maturities of 20 to 30 years), notes (maturities of 2 to 10 years), or bills (4 to 52 weeks), borrowing money at fixed rates.
This might not have mattered if, as was the case since the Global Financial Crisis, interest rates in general and yields on Treasurys were extremely low. Debt becomes easy to manage, and when it comes due, like with CRE refinancing, the U.S. rolls the debt over by borrowing anew and paying off the previous Treasury securities.
Federal borrowing is intricate. The Treasury Department regularly auctions newly issued combinations of bills, notes, and bonds, mixing what they think will sell and what will likely have the most favorable interest rates. They also keep an eye on what the Federal Reserve does with interest rates, as they can affect yields on the shorter-term Treasury instruments. Treasury Secretary Janet Yellen, previously Fed Chair and a respected figure in economics and finance, has been unusually qualified to navigate the government’s needs.
Things are only getting more complicated. Trump and Republican majorities in both houses of Congress have indicated they want the 2017 tax cuts extended. The Committee for a Responsible Federal Budget estimated in late October 2024 that Trump’s plans for extending tax breaks could increase the debt by between $1.65 trillion and $15.55 trillion through 2035, with a central projection of $7.75 million. They also pointed out that Trump hadn’t presented a plan to reduce debt.
Interest rates shot up to control inflation, which has helped support higher yields on Treasurys. But longer-term instruments react to other forces. One is concern about future inflation and interest rates. Plans to extend tax cuts and Trump’s new announcements of 25% tariffs on Mexico and Canada — the top two trading partners of the U.S. — until the two reduced cross-border drug trafficking and illegal border crossings by migrants. The long-lasting issues aren’t likely to be solved quickly, particularly if the U.S. takes a hands-off position.
The result would likely drive up the debt and inflation, potentially reversing Fed plans to increase the federal funds rate. Concerns about the future could drive down bond prices and drive yields up, especially on the 10-year. All this is why financial professionals have moved their concerns from rising prices to rising U.S. debt, as Reuters reported.
That could put CRE borrowing between two opposite pressures. Higher shorter-term interest rates pushed by the Fed to manage inflation would increase the price of bridge and construction loan rates. Higher 10-year yields affect longer-term CRE mortgages because the 10-year is typically considered risk-free.