With the Treasury department’s continued buying spree, it is no surprise that the benchmark 10-year Treasury (US10Y) has remained near all-time lows, closing today at 0.62%. A steady flow of unemployment claims due to “shelter in place” related layoffs combined with the US financial markets currently in disarray has investors looking into treasuries as a safe-haven investment. Lenders typically price loans with a spread over their benchmark index; the US10Y is the most common benchmark used by lenders to price loans.
But, as many lenders are also active investors in other segments, corporate bond spreads and others are having a direct effect on commercial real estate paper yields. This has contributed to shifting the market from a “cost of capital” model to what we’re phrasing an ”opportunity cost of capital” model. The market for the margin or “spread” over Treasuries has been volatile along with the rest of the financial markets over the past few weeks. This is also our indication of where lenders see a risk premium for their loans as opposed to investing in Treasuries, corporate bonds, or other alternative investments.
The current market for a typical 10-year fixed-rate loan ranges from approximately 3.50% to 4.50%. We expect the volatility of the last couple of weeks to settle down as the markets get used to a “new normal.”