How Market Benefits Build-to-Rent Investors
Despite the Federal Reserve signaling a path of short-term rate cuts through 2030, the US borrowing market is splitting into two distinct paths, with investors looking to be the early beneficiaries. Investors using floating-rate debt (primarily CRE and investors) are poised for outsized debt service relief as their base rate, SOFR, falls. Conversely, the core engine of US residential demand and liquidity, the 30-year fixed mortgage market, is unlikely to thaw significantly in the near term, with markets signaling rates in the mid-6s through 2026. This divergence stems from a key Fed decision: cutting short-term rates, while remaining on the sidelines as it pertains to open market operations.
Securities Holdings Decline
On Thursday, the Federal Reserve released an update on its balance sheet, which currently shows securities holdings of ~$6.28 trillion. This figure represents a 5.5% decline from the prior year, driven by a decline in securities holdings, clear evidence of the ongoing quantitative tightening (QT) that started in 2Q22.
Spreads Expand for Treasury and Mortgage Rates
The $6.6 trillion total asset base is almost entirely made up of US Treasuries ($4.2 trillion) and mortgage-backed-securities (MBS, $2.1 trillion). Prior to QT, the Fed held nearly $2.7 trillion in MBS, acting as a guaranteed, price-insensitive buyer. That mechanism is now gone, and the Fed has given no indication that it will resume open market purchases, despite cutting rates. For institutional investors, this means the liquidity premium required to hold long-duration, non-guaranteed assets now have a permanently higher floor, even if the underlying economy stabilizes. Without the Fed putting downward pressure on yields in both markets, we have seen spreads expand for both treasuries and mortgage rates.
Curves for SOFR and Treasuries Show Bifurcation
Unlike the short-term rates that drive rates for CRE and leverage providers, long-duration, fixed-rate debt is far more impacted by credit and inflationary risks. We can see this dynamic in today’s forward curves, which are primarily used by institutional investors and reflect market-implied expectations for a wide variety of securities, including interest rates. Chatham Financial, widely used derivatives advisor within this niche, publishes intra-day forward curves for both SOFR and Treasuries. As of September 30th, these curves show a clear bifurcation.
10-Year Treasury: Higher Rates Despite Cuts?
With inflation expectations back to January levels after tariff announcements in April, Treasury yields have risen and have stayed elevated. Concerns that rate cuts could further stoke inflation have pressured yields even higher in this period. As a result, we have seen investors price in higher treasury yields over the next decade. As for mortgage rates, investors also must account for record levels of unaffordability for home ownership (~46% of annual income, according to the Federal Reserve of Atlanta) at the national level, as well as rising concerns about the labor market. This has driven spreads (30 Year Fixed, less 10 Year Treasury Yield) of over 2%, levels only seen during the GFC and beginning of COVID.
With Treasury yields expected to rise, along with continued risks in housing, it becomes clear why mortgage rates do not seem primed for the rapid declines many are hoping for, with even a constant spread indicating rates will likely remain in the mid-6s.
If this materializes, mortgage originations and refinances will remain muted, while rental demand stays resilient. Build-to-Rent investors, however, stand to benefit. Their financing costs are tied to SOFR and other short-term benchmarks, which are priced for cuts. Even in a conservative case, a 100+ basis point decline in SOFR by 2027 would improve DSCRs, enhance liquidity, and expand feasible projects, all while renter demand strengthens. In short, the divergence between fixed-rate housing and floating-rate CRE sets the stage for BTR to win the rate game.