Treasury Yields Rise a Little as Tariffs Are Delayed

As the U.S. Federal Reserve delays its planned interest rate hikes, Treasury yields have risen slightly, with the 10-year Treasury yield climbing to 3.8% as of May 2023. This modest increase in yields has investors wondering how REITs will fare in this environment. Historically, REITs have performed well during periods of rising long-term interest rates, with average four-quarter returns of 16.55% compared to 10.68% in non-rising rate periods from the first quarter of 1992 to the fourth quarter of 2021. Additionally, REITs have outperformed broad equity indexes during many of these periods of rising interest rates.



However, the recent Fed tightening cycle due to inflation creates additional uncertainty about whether the correlation between REIT returns and long-interest rates will remain positive. REITs have historically outperformed during periods of above-average inflation, but the current environment is unique, with inflation expectations remaining elevated despite the Fed's efforts to bring them down.

REITs can adapt their strategies to mitigate risks associated with rising interest rates and tariff-related uncertainties by diversifying their portfolios, maintaining strong balance sheets, focusing on defensive sectors, investing in inflation-protected assets, and actively managing their portfolios. By implementing these strategies, REITs can better navigate rising interest rates and tariff-related uncertainties, ultimately protecting shareholder value.

For income-seeking investors, REITs' dividend yields may become relatively less attractive as bond yields rise. However, REITs are known for their reliable dividend payouts, and their dividends can still be attractive compared to other income-generating investments. Additionally, REITs offer other benefits, such as diversification, liquidity, and tax advantages, which can make them an attractive investment option in a rising interest rate environment.

In conclusion, while the recent rise in Treasury yields may pose challenges for REITs, their historical performance and adaptability suggest that they can still provide attractive investment opportunities for income-seeking investors. As always, it is essential to consider the specific REIT in question, its performance, dividend payout history, and debt levels when making investment decisions.