Implications of the Fed’s Balance Sheet Policy Shift for Residential Development Credit

Executive Summary‍

The Federal Reserve’s decision to end balance sheet runoff beginning December 1, 2025 marks a shift from quantitative tightening (QT) to a neutral reinvestment posture. This change is likely to lower long-term yields, improve liquidity across fixed-income markets, and ease mortgage rates over time. For investors in residential development credit, this transition provides an improved macro backdrop: builder and developer fundamentals strengthen, project velocity increases, and underlying collateral values stabilize. These dynamics reinforce the appeal of AREC’s homebuilder and land development loans relative to other private credit strategies that are more dependent on short-term rates or corporate refinancing cycles.

Policy Overview‍

Starting in December 2025, the Federal Reserve will stop allowing its Treasury and agency holdings to decline and will reinvest all maturing proceeds into new Treasuries. It will also reinvest mortgage-backed security (MBS) proceeds into Treasuries rather than allowing them to roll off. This policy halts QT and establishes the Fed as a consistent source of demand for Treasuries—stabilizing liquidity and anchoring longer-term interest rates.

Market Implications‍

By increasing demand for Treasuries, the Fed will exert downward pressure on yields and improve overall fixed-income liquidity. The move also supports MBS pricing by reducing net supply, which tends to narrow spreads and ease funding costs for mortgage lenders. Mortgage rates, though not directly linked to the Fed Funds Rate, generally move in line with long-term Treasury yields—particularly the 10-year note, which reflects the average duration of most mortgage pools. The result is a likely moderation in borrowing costs across the housing market. Lower mortgage rates improve affordability and lift absorption for new homes, which supports homebuilder profitability and encourages lot takedowns from land developers.

Impact on Residential Development Credit
These trends create a positive feedback loop for AREC’s lending strategies:

- Builders experience stronger demand and faster inventory turnover.
- Developers face improved refinancing options and enhanced takeout visibility.
- Underwriting risk declines as project velocity and collateral liquidity increase.

In contrast to many other private credit strategies—such as leveraged corporate lending, where credit quality can deteriorate as growth slows—residential development lending benefits from lower long-term yields and stable consumer demand. Housing’s sensitivity to mortgage rates, coupled with the limited supply of new lots in key markets, creates a structural advantage for credit exposures tied to land and vertical construction financing.

Conclusion

‍The Fed’s transition from QT to a reinvestment regime should foster lower yields, narrower credit spreads, and a more constructive environment for residential development. Within private credit, AREC’s builder and developer loans are uniquely positioned to benefit from this shift, combining strong collateral coverage with exposure to an improving housing cycle. The policy backdrop into 2026 supports both stable income generation and capital preservation—two attributes that define the Fund’s approach to disciplined, real-asset-backed credit.