This past weekend both the Financial Times and Barron’s published articles on substantial surveys on the direction of rates, specifically the Fed overnight rate and the Ten Year Treasury.  The FT’s survey of “51 top economists” indicated a median projection of an increase in the Fed window rate of 75 basis points.  The Barron’s survey of market strategists for ten major financial institutions produced a range of outcomes for December 2016, placing the Ten Year Treasury between 2.3% and 3.25%.

What impact would this have on the rates offered by the 504 program?

In terms of intellectual curiosity, there is a 89% or better correlation between the Ten Year Treasury and the underlying debenture rate.  (The data string shown above is clearly skewed by the divergence which occurred after the failure of Lehman Bros. during the recent unpleasantness.)  This implies that the underlying debenture tracks the less tight correlation of the Ten Year Treasury to overnight rates, moving possibly some thirty to sixty basis points higher, over the course of the year.

In terms of practical reality, it truly serves us well to remember that the all-in rate paid by the borrower does not set until just before the debenture funding, to which, there are conditions precedent.  Even in a straight acquisition this implies a rate some forty-five to sixty days out.  In a significant renovation, much less ground-up construction a forward timeframe of six to eighteen months is entirely possible.  In even what likely appears to be a gently rising rate environment, this practical consideration has importance.

We serve our borrowers and bankers better with a brief discussion of the mechanics for setting debenture rates and a clear eyed discussion of when a funding is most likely to occur, rather than with a simplistic, if not disingenuous, statement of “this month’s rate is X”.