Written by Frank Keane
When will interest rates start to rise again? The answer to that question will affect the Real Estate Advantage (REAL 504) Loan as well as 7(a) rates in a significant way since one program draws its funding from the rates market while the other accesses bank deposits and the current low cost of Federal Funds, 0.25%.
When asked when the Fed might start raising rates after it ends its QE3 purchases, Fed Chair Janet Yellen said, “about six months.” Her direct answer to a question that elicited vague responses from her predecessor sent the Dow Jones Industrial Average down 114 points, gold down by $26, 10-year Treasury yields higher by .09 basis points and most importantly, moved the yield curve flatter which means higher short-term rates in the financial markets.
When talking about rates, the conversation needs to be specific because the Fed may hold its Federal Funds rate where it is, but the market will act far in advance of that move and this week’s action in short-dated maturities provides a preview of what is to come. In other words, an official rates increase six months after the end of QE3 might occur faster as the market anticipates and pre-emptively adapts to expected Fed moves.
As rates start to rise, borrowers will look to lock in fixed-rate, term funding in a market with higher employment and economic growth whose natural demand for funding will be increased by as much as $14 billion of small balance C&I loans that will mature in the next four years.
Meanwhile, banks will have less incentive to offer long-term fixed rates as they benefit from variable rates in an environment of expected hikes.
Assuming her candor was intentional, Yellen’s answer provided much needed clarity in her first post FOMC press conference as Chairwoman on Wednesday. After announcing the Fed would continue to taper its monthly bond purchases to $55 billion per month, and that it was moving away from its 6.5% unemployment rate threshold to use of a broader array of economic and financial indicators, she also put to rest the speculation game known as “what the Fed chair might mean.”
“ I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant.”
— Alan Greenspan
If the Fed continues reducing its bond purchases at this pace, QE3 could end by the fall, meaning the Fed could start raising rates earlier in 2015 than had been expected. The rate referred to in Fed policy is the Federal Funds rate that has been at 0.25% for five years, but the market has already put higher short-term rates in motion as two-year and five-year Treasuries have risen 0.11 and 0.17 basis points respectively, in the last month. Meanwhile, 10-year sector rates which affect our REAL 504 rates, were unchanged.
In short, rising short-term interest rates should stimulate interest in fixed-rate REAL 504 loans, since borrowers will be negatively affected by resets in variable-rate loans.
Frank Keane is the fiscal agent for DCF LLC. Frank has 30-years’ experience in capital markets trading, risk management and regulatory compliance. He is a former director at Merrill Lynch GSI and Managing Director at Banc of America Securities. Since 2008, Frank has been President and Chief Compliance Officer of Eagle Compliance LLC, a firm specializing in Broker/Dealer Operations and Anti-Money Laundering audits. His educational background is: BA – Economics, New York University; MA – Management, Seton Hall University; and FINRA Institute/ Wharton – Certified Regulatory Compliance Professional.