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30-Year Yield Hits Highest in More Than a Year: What It Means for REITs

AInvestMonday, Jan 6, 2025 8:39 am ET
3min read



The 30-year yield has reached its highest level in more than a year, raising concerns about the impact on Real Estate Investment Trusts (REITs). As interest rates rise, borrowing costs for REITs increase, making it more expensive to finance new acquisitions and developments. This can lead to a slowdown in expansion plans and a focus on more conservative investments. However, REITs have historically 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.



REITs have also outperformed broad equity indexes during many of these periods of rising interest rates. The relationship between the four-quarter change in the 10-year Treasury yield and the difference between four-quarter total returns on REITs and the S&P 500 is shown in the chart below. REITs outperformed the S&P 500 in half of the periods when Treasury yields were rising from the first quarter of 1992 to the fourth quarter of 2021.

REITs appear to be well prepared for higher interest rates in the months ahead, according to the Nareit T-Tracker®, a summary of operating performance and financial position of the listed REIT sector. REITs have strengthened their balance sheets and reduced exposures to interest rates. Equity issuance has been strong, leverage has declined, interest expense has declined, debt maturities have lengthened, and interest coverage ratios are high.



However, the recent increase in the 30-year yield is likely to make REITs less attractive compared to other income-generating investments, such as bonds. As interest rates rise, bond yields become more competitive with REIT dividends, making bonds more appealing to income-seeking investors. The yield on the 30-year Treasury bond has increased, which means that investors can now earn a higher return by investing in long-term bonds, rather than REITs.

In conclusion, while the 30-year yield's recent increase may present challenges for REITs, the sector has historically shown resilience during periods of rising interest rates. REITs' strong balance sheets, lower leverage, and high interest coverage ratios help them manage their debt more effectively, reducing the impact of higher borrowing costs on their profitability and cash flows. However, investors should remain vigilant and monitor the situation closely as interest rates continue to rise.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.