After trading in a range of 1.85%-2.25% since January 2015, the 10-year Swap Rate began a steady ascent in May that accelerated in June. The first week of June saw the 10-year Swap Rate rise from 2.23% on Monday to 2.48% on Friday, leaving borrowers shell-shocked. The market worsened the week of June 8, as the 10-year Swap hit 2.55% on Thursday, June 10 before settling down at the close on Friday at 2.43%. Whether the 2.55% level represents a short-term peak or just a temporary breather in a march to higher levels is anyone’s guess. After three months of relatively stable fixed-income markets, the volatility in June is an unwanted surprise.
Market participants suggest that rising rates can be traced to worries about a Greek bond default, a strong unemployment report on Friday, June 8 and uncertainty regarding the Federal Reserve policy meeting outcome on June 16-17.
The unrelenting rise in loan rates is depressing CMBS borrowers as CMBS loan spreads are not declining, and in fact, they are poised to increase (see our 6.11.15 News Item), leading to higher-than-expected rates on loans under application. Furthermore, borrowers considering a CMBS refinance to secure an attractive long-term fixed rate are backing away now that rates are approaching 5.0%, after enjoying rates in the 4.25%-4.50% area for most of 2015.
“We are still active in CMBS refinancings in which there is a large cash equity return to the borrower that helps absorb the higher rate, opportunistic refinances (i.e., discounted payoffs, or payoffs of debt acquired by a third party) and loans refinanced at maturity,” commented Michael D. Sneden, Executive Vice President of ValueXpress. “But the discretionary borrower looking for a rock-bottom rate is gone. That borrower is often opting for a community bank loan; those institutions are slow to adjust their loan rates to current market conditions, providing banks with a current competitive advantage over CMBS in terms of rate.”