Lower CPI from reduced rents means lower US interest rates. Time to buy Bonds?

Group Chairman Alain Freymond and CEO Ahmad Saidali share insights about the potential benefits of declining US rents on future CPI readings: an opportunity to buy Bonds? Read on for more.

New rents in the United States have recorded a decline of -3.5% in January compared to their peak reached in August 2022. This is now the first consecutive six-month decline sequence in five years. After benefiting greatly from increased demand following the pandemic, which had caused a +25% increase in rents, the US real estate market will now also face a significant wave of new apartments entering the market, estimated at around 500,000 new units. While the level of affordability was at its lowest, mainly due to higher financing costs, the demand for rentals had initially supported rents.

This is no longer the case. More than 50% of rents due for renewal in January were not renewed, suggesting that tenants were already finding cheaper accommodations elsewhere. House rents are also stabilizing and vacant apartments have been increasing for several months due to weaker demand from potential renters.

As rents begin to decline, the "shelter" component of CPI indices is slow to adjust and even showed an increase of +8% YoY in January. This phenomenon is not surprising. The likely 12-month lag should become more evident in the 2nd quarter and reinforce the decline of the US CPI. The Fed will certainly wait for this moment before considering the impact of the actual evolution of rents on inflation.

We believe that a decrease in rents could signal lower future inflation rates and interest rates, potentially leading to capital gains for bond investors.