11.26.16: Borrowers Adjusting to Higher Rates Post-Election

10-year Treasury and Swap rates have moved up significantly since U.S. presidential election results on November 8. The following chart shows the move in the Treasury since the election.

Nov 2016

Yield (%)

23

2.37

22

2.32

21

2.33

18

2.34

17

2.29

16

2.22

15

2.23

14

2.23

11

2.15

10

2.15

9

2.07

8

1.8

The 10-year Swap rate has moved in tandem with the 10-year Treasury Rate, to 2.20% from 1.70% during the same period.

The 50 basis point rise in the Treasury/Swap indexes has directly impacted interest rates to borrowers on CMBS conduit loans and other income producing loan products as these indexes are used to set the interest rates on CMBS conduit loans (Interest Rate = Swap + Loan Spread). The rise in rates has caused some borrowers to wait and see if the rise is overdone and whether Treasury/Swap indexes can reverse course. Typically markets overreact to events and eventually settle back down, but many market pros believe that sub-2% Treasury/Swap indexes may be a thing of the past.

However, loan spreads are expected to decrease as the higher Treasury/Swap indexes will likely slow CMBS originations in 2017 (see our 11.23.16 article), reducing the supply of CMBS to investors. The expected decline in loan spreads will partially offset the rise in the Treasury/Swap indexes, but not completely.

“Whereas we had CMBS conduit loan rates in the 4.25%-4.75% rate here in the fall of 2016, it appears rates could drift over 5.0% in the beginning of 2017,” commented Michael D. Sneden, Executive Vice President at ValueXpress.

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