By: Head of Data Strategy at LightBox, Manus Clancy
If you blinked last week, you probably missed a few wild swings in the bond market. After spiking north of 4.5%, the 10-year Treasury yield has eased back down to around 4.33%— as of press time—but don’t mistake that for calm.
There’s a lot happening beneath the surface, and commercial real estate is very much in the blast zone. Whether you’re pricing debt, assessing value, or just trying to figure out if the market has stabilized, you need to understand what’s really driving yields.
Why Are Treasury Yields Moving So Much?
The usual narrative—Fed policy, inflation, economic growth—is always part of the story. But this week, there were some lesser-discussed forces shaping what’s happening in the bond market and each has a direct impact on how CRE is priced, financed, and forecasted.
1. Running Out of the Safety Trade (a.k.a. FOMO in Stocks)
Historically, investors run to the safety of U.S. Treasuries during times of peak volatility and race out of them when the fear recedes. During the height of the tariff panic, investors piled into Treasuries, pushing the yield on the 10-year below 3.90% briefly. Once it became clear that a 90-day pause on tariffs would take place, investors reversed course: fearing they would miss the equity market melt up, they sold out of bonds and into equities. This happens regularly during periods of high pearl clutching, so the steep drop in Treasury yields followed by the reversal was par for the course. But unlike other bond market whipsaws, this one had other factors.
2. Foreign Holders Are Selling—Especially China
This is a big one that doesn’t get enough attention: Foreign buyers are no longer propping up the U.S. bond market like they used to.
China alone holds about $800 billion in U.S. Treasurys, and they’ve been quietly trimming that exposure. Add in Japan and other sovereign wealth players, and you’ve got a steady stream of selling—not enough to break the market (yet), but enough to add upward pressure on Treasury yields
Why does this matter?
Because fewer foreign buyers mean more Treasury supply must be absorbed by marginal domestic or international investors—those who typically shun Treasuries in favor of risk assets with higher returns. Coaxing these hesitant or periodic buyers into the Treasury market will require higher yields—never a good thing for the CRE markets.
3. The Unwinding of the Basis Trade
Here’s where things get wonky—but it’s important.
The Yen basis trade is a strategy where hedge funds borrow in the low-yielding Japanese bond market and invest in the higher-yielding U.S. bond market. The trade works as long as Yen-based yields remain low, U.S. bond yields remain attractive—and currency levels stay range-bound.
Periodically, during times of high volatility, the risks to the trade outweigh the reward—the strategy threatens to turn negative. At that point, investors who have put on the trade race for the exits. This means selling U.S. dollar-denominated bonds and repaying Yen-based loans. It’s this flurry of selling—investors trampling each other for the exits—that pushes U.S. Treasury yields higher.
Wait—Didn’t Inflation Data Just Come In Better?
Yes, and that’s the weird part.
- Core CPI (Consumer Price Index) rose just 0.1% in March, which translates to a 2.8% annualized rate—the lowest since March 2021.
- PPI (Producer Price Index) actually fell 0.4% in March and slowed to an annual rate of 2.7%, down from 3.2%.
But both data points were collected before the April 2 tariff announcement and partial rollback.
Markets are now trying to price in what comes next—not just what the March data says. And with trade policy back on the table, investors are wary that tariffs could re-ignite inflation down the road. That’s keeping a floor under yields even as the inflation trend looks modestly better.
What It Means for CRE
The CRE market thrives on low rates and low volatility. Borrowers want low debt costs and supply cost certainty. (They certainly didn’t sign on for a tariff-induced recession, if it comes to that).
A 10-year yield at 4.33% isn’t catastrophic. We saw that CRE economic activity rebounded in H2 2024 even as rates stayed higher for longer.
But there are several things that could become problematic for CRE landlords and developers should the heightened volatility persists:
- Cost of capital moves higher: It’s not out of the question that the next move for Treasury yields and risk premiums is upward. As the cost of capital rises, transaction volume tends to decline. If that happens, the market may be forced to reset again—much like it did in 2023, when buyers and sellers remained far apart on pricing.
- Refinancing risk is rising. Loans maturing in 2025-2026 were underwritten in a very different rate environment. If yields stay sticky, we’re going to see more distressed assets coming to market. Some assets may “muddle through” with a 4% 10-year Treasury. Fewer would be able to refinance their way out of trouble with a 5% 10-year.
The Reset Isn’t Over
We’re not in a crisis—but we’re not in calm waters either. The move to 4.33% on the 10-year may not grab headlines, but it reflects a market that’s still trying to figure out what “normal” looks like. And for CRE, that means the reset isn’t over.
Smart investors are watching the bond market as closely as they watch NOI. Because if you want to understand where values are headed—or whether the deal pencils—you need to understand the cost of capital. Right now, that cost is still creeping higher.
Stay sharp out there.
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