Commercial real estate could be the next danger spot in the wobbly U.S. financial sector, according to Bank of America. One warning sign: Spreads for commercial mortgage-backed securities are at their widest compared with Treasurys since May 2020, said investment strategist Michael Hartnett. "CRE widely seen as next shoe to drop as lending standards for CRE loans to tighten further," Hartnett wrote in his weekly "Flow Show" report of where market money is gravitating.
That comes at a time when the Federal Reserve continues to raise interest rates , making conditions more difficult. Hartnett said the combination is dangerous as the banking industry undergoes tumult . He noted that during the savings and loan crisis in the late 1980s and early 1990s, the Fed didn't start cutting until weekly jobless claims surged and nonfarm payrolls declined, meaning the central bank could keep policy tight despite weakening credit conditions.