Board of Governors of the Federal Reserve System

1. Asset Valuations

Asset valuations remained elevated, although risk premiums increased in several markets amid periods of higher volatility

Asset valuations stayed at the high end of their ranges in most markets. Measures of broad equity valuations remained elevated. Corporate bond and loan spreads continued to be low by historical standards. Since the last report, Treasury term premiums increased amid periods of heightened interest rate volatility. Prices and fundamentals in CRE markets showed continued signs of stabilizing, although the potential for distressed commercial property sales remains if CRE borrowers who need to refinance their mortgages are unable to do so. In residential real estate markets, prices remained well above their historical relationship with fundamentals, even as house price growth has continued to slow.

Table 1.1 shows the sizes of the asset markets discussed in this section. The two largest asset markets are those for public equities and residential real estate, which are substantially larger than the next two markets, Treasury securities and CRE. The table also shows recent and historical growth rates for each asset class. The remainder of this section presents the status of vulnerabilities across these markets.

Table 1.1. Size of selected asset markets

Treasury yields inched up, and volatility, on net, was little changed

Treasury yields across 2- and 10-year maturities rose modestly since the November report and continued to be well above their average levels over the past 15 years (figure 1.1). A model-based estimate of the nominal Treasury term premium—a measure of the compensation that investors require to hold longer-term Treasury securities rather than shorter-term ones—rose to a level near the top of its range over the past 15 years, although it is in line with its historical median over a longer horizon (figure 1.2). Interest rate volatility implied by interest rate swaptions moved higher in March but subsequently retreated, leaving it little changed, on net, and near its long-term median (figure 1.3).

Equity valuations remained high despite increased volatility

Measures of equity valuations remained high since the previous report. The forward price-to-earnings ratio, defined as the ratio of equity prices to expected 12-month earnings, remained well above its historical median (figure 1.4). The difference between the forward earnings-to-price ratio and the real 10-year Treasury yield—a crude measure of the additional return that investors require for holding stocks relative to risk-free bonds (the equity premium)—moved up a touch from an overall low level (figure 1.5).² Two measures of equity market volatility—option-implied and realized—increased since November, with option-implied equity volatility moving to a level above its historical median (figure 1.6).

Corporate bond spreads remained low by historical standards; credit concerns increased for riskier debt

Yields on triple-B-rated bonds rose since November and approached their long-run medians, while those for high-yield bonds also rose but remained low by historical standards (figure 1.7). Spreads relative to comparable-maturity Treasury securities were roughly unchanged and remained at the low end of their historical range, although spreads for speculative-grade technology firms widened more notably (figure 1.8). The excess bond premium for all nonfinancial corporate bonds—a measure of the risk premium required by bond investors after controlling for bond characteristics and credit quality—continued to edge down and remained below the median of its historical distribution (figure 1.9).

Issuance in the corporate bond market remained strong in early 2026, as investor appetite for corporate debt appeared generally resilient. Bond issuance among the largest investment-grade firms involved in cloud computing neared $100 billion in the first quarter and was met with strong investor demand. Market-based forecasts of one-year-ahead default probabilities of nonfinancial firms (a forward-looking indicator of credit quality) were little changed and remained at the low end of their historical distributions.

Since the previous report, the average spread on leveraged loans in the secondary market increased moderately, reflecting a high concentration of leveraged loan borrowers in the software industry. Overall, the average spread continued to be below its historical median since 2009 (figure 1.10). Moreover, new-loan spreads in private credit markets ticked up, reflecting ongoing investor concerns over the credit quality of private credit portfolios.

Some measures of market liquidity deteriorated in March but since recovered

Market liquidity refers to the ease of buying and selling an asset. Low liquidity can amplify the volatility of asset prices and result in larger price moves in response to shocks. In turn, increased volatility can reduce market liquidity because liquidity providers may become more cautious in providing quotes. In extreme cases, low liquidity can threaten continued market functioning, leading to a situation in which participants are unable to trade without incurring a prohibitive cost.

Treasury market liquidity is particularly important because of the key role these securities play in the financial system. Since the November report, geopolitical risk associated with developments in the Middle East led to periods of heightened interest rate volatility, especially for shorter-tenor Treasury rates. Treasury market liquidity initially deteriorated in line with this heightened volatility, demonstrating the vulnerability of market liquidity during periods of acute stress. In subsequent weeks, liquidity recovered, and, on net, market depth—a measure of liquidity in the Treasury market—was little changed since the previous report (figure 1.11). That said, a market depth measure for the most liquid on-the-run two-year Treasury note remained near the first quartile of its historical distribution (figure 1.12).

A measure of market liquidity in equity markets declined since November and moved toward the lower end of its historical distribution since 2019 (figure 1.13). Liquidity in corporate bond markets remained robust through March and in line with the average level observed in recent years.

Commercial real estate prices continued to stabilize

Aggregate CRE prices measured in inflation-adjusted terms showed further signs of stabilization, following significant declines between mid-2022 and early 2024 (figure 1.14). Vacancy rates and rent growth—fundamental determinants of prices—likewise continued to stabilize across a broad range of property sectors. Capitalization rates at the time of property purchase, which measure the annual income of commercial properties relative to their prices, have recovered from historical lows reached in 2022, rising to a level just below its historical average in the most recent data (figure 1.15).

According to the January 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks' lending standards on new CRE loans, which tightened steadily from 2022 through 2024, have eased over the second half of 2025 (figure 1.16). Moreover, survey respondents expect modest improvements in the credit quality of existing CRE loans going forward.³

A large volume of CRE debt is scheduled to mature over the coming year, raising the possibility that forced sales, were they to occur, could put downward pressure on CRE prices. Lenders' willingness to extend or modify maturing loans has helped to limit this risk to date. However, this option may be increasingly limited going forward, and this is a particular concern in the non-agency CMBS market. Even so, spillovers to broader CRE prices would likely be limited, as non-agency CMBS represents a small share of total CRE debt.

Residential real estate prices remained high relative to their historical relationship with fundamentals

House price growth has continued to moderate over the past several years (figure 1.17). Model-based measures of housing valuations, which assess their historical relationships with fundamentals, remained high (figure 1.18). Price-to-rent ratios were largely unchanged and remained at elevated levels across geographic areas, particularly in places where they have been high in recent years (figure 1.19). Credit standards for borrowers have remained tight relative to the early 2000s, suggesting that currently elevated house prices are not the result of weak credit standards.

Farmland valuations are at historical highs

U.S. farmland values remained elevated based on annual data as of December 2025. Inflation-adjusted farmland prices and price-to-rent ratios have continued to rise and currently stand at historically high levels (figures 1.20 and 1.21). Elevated price levels continue to be sustained by limited farmland inventory, despite elevated interest rates and higher operating costs.

 

References

 

 2. This estimate is constructed based on expected corporate earnings for 12 months ahead. Return to text

 3. The SLOOS results reported are based on banks' responses weighted by each bank's outstanding loans in the respective loan category and might therefore differ from the results reported in the published SLOOS, which are based on banks' unweighted responses; SLOOS results are available on the Board's website at https://www.federalreserve.gov/data/sloos.htm. Return to text