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CHEAP DEBT ENVIRONMENT LIKELY TO END IN 2015
Although interest rates have defied expectations in recent quarters, the historically low rate, cheap debt environment is likely to end in 2015. With improved economic conditions, the Federal Reserve has indicated its intentions to conclude its QE3 bond-buying programs in October 2014. Furthermore, the Fed is likely to begin raising the federal funds rate, currently at a 0.00%-0.25% target rate, by mid-2015, and the consensus among FOMC members is for a 3.75% fed funds rate by 2017.
Market participants are anticipating this increase, with two-thirds of US respondents expecting interest rate increases in the coming year. It is important to note, however, several factors that do not make interest rate increases a foregone conclusion. Wage growth, which the Fed has cited as an important factor in its decision to raise rates, remains well below the rate consistent with the Fed’s target inflation rate of 2%. Also, global issues in EMEA and Asia Pacific have continued to drive investors to the safety of the 10-year Treasury, suppressing yields. A continuation of these trends could keep rates low in 2015.
Yield expectations are mixed, although few expect further compression. Nearly 60% of respondents expect yields to remain stable, and nearly 30% expect them to increase. In 2014 and 2015, there is expected to be growing demand for higher yielding assets, for which yield-to-Treasury spreads remain wide, such as properties in secondary and tertiary locations and suburban office buildings.
DEBT AS AN ASSET CLASS LOSES ITS SHINE
None of these worries about the costs of financing will keep players from the market; almost 90% of survey respondents find themselves likely or highly likely to use leverage in future investment decisions while almost 85% of respondents expect they will be likely or very likely to finance or refinance portfolio assets in the coming year. And it seems credit standards have not held up to the demands for more leverage in the market; 63% of survey respondents in the US saw loosening underwriting standards over the last six months and 47% see further loosening in the coming year.
This does not bode well for investors in debt; less than 40% of survey respondents saw debt as an attractive alternative investment. This is down over 10% from the response level in last year’s survey.
North America increases as a target as one third of Asian investors express their intention to invest in the region || Brian Ward
2015 GLOBAL INVESTMENT SENTIMENT REPORT COLLIERS INTERNATIONAL
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