Bull Steepener Ahead: What It Means for CRE and Balance Sheet Risk

It looks like we are headed into a bull steepener yield curve scenario. 

↘️ Front-end treasury rates (2-year) are already coming down as markets price in multiple Fed cuts. Futures show an 87% chance for a 25pbs cut in Sept, 54% for another 25bps in October and a 43% chance for an additional 25bps at the December meeting. 

↗️ Yet the 10-year remains stubbornly high. This is likely a pivot point in the rate cycle and institutions should be stress-testing their balance sheet.

✔️ Why the long end is likely to remain elevated:

Weak demand at the latest 10-year Treasury auction forced primary dealers to absorb more of the issue, signaling lack of investor appetite to lock in current yields.

Tariff-driven inflation risks and ongoing supply concerns continue to prop up long rates, even as the Fed moves toward cuts.

Even with a potential recession on the way, chances are pretty high that long rates will remain elevated...

🛑 What this means for CRE refinancing:

If your CRE loans are tied to the 10-year (likely), don’t bank on much relief. Refinancing costs will likely remain elevated well into the easing cycle.

This is why stress-testing is so important and here are some ideas for interest rate risk and credit risk managers:

💡 1. IRR Modeling - Bull Steepener Scenarios

Model a 100–150 bp drop in short rates (2-year), while the 10-year stays flat or only dips modestly.

Evaluate margin and funding exposure:

✅ Long-end exposure: Fixed-rate loans funded by short-term deposits can see earnings pressure if the long end stays high and deposit rates don't move down in lock step with fed funds. There is likely to be a lag for sure as competition is real.

✅ Short-end exposure: Floating-rate loans funded with longer CDs could see margin squeeze if short rates fall.

💡 2. CRE Credit Stress Testing

Identify loans maturing or repricing in the next 12–24 months. Simulate re-pricing using today’s 10-year swap/Treasury + your spread.

Run sensitivities:

DSCR compression from lower NOI and higher cap rates.

Refinance gap - how much equity injection would be needed if LTVs exceed policy limits.

Combine adverse factors: stubborn long rates + NOI decline + tighter credit standards to assess equity calls, payment stress, or defaults.

🐂 We’re likely headed into a bull steepener with front-end easing expected, long-end staying high. For CRE, that means refinancing relief is far from guaranteed and for institutions, it’s time to model the risk before it hits your books.