April 15, 2014
By Tom Wallace
The April twenty year debenture auction saw continued stability with a small drop of ten basis points from the March results to 3.11%. This is a product of the stabilization of the ten year treasury at just below 3% over the past few months, to which the debenture rate is effectively linked. This stabilization of rates, is unexpected, in the context of an economy gaining traction, where a more sustained rise in rates would normally be anticipated.
Chart and Statistical Data is from September 2006 to April 2014
The more unexpected development may be that this plateau may have more to run. The federal deficit is declining significantly as a percentage of GDP and is doing so at a rate faster than that anticipated by the Congressional Budget Office. As a result, the impact on rates from the tapering of Treasury purchases by the Fed, may be well offset by a diminishing supply coming to market. While this may change by 2016, until then we may enjoy a period of lower than expected rates available to the 504 program. (1)
Take this in context with reports on maturing CRE loans, which are estimated at some $1.4 Trillion, between now and 2017. (2) In the aftermath of the recent unpleasantness, the CMBS market remains anemic and major banks have been told to further increase capital, thus limiting credit available. (3) These limitations may be exacerbated by LTV issues and underwriting requirements for heavier equity strokes, which would likely have a greater impact on small business concerns.
The 504 refinance capability, if re-authorizied, would directly address these issues. By enabling small businesses to responsibly address maturing long term debt issues, a significant uncertainty would be lifted from a critical sector of the economy, small business. Unlike the last iteration of the 504 refinance capability, a regulatory framework already exists, thus benefits in job creation and tax revenue, would be more immediate.
504 program participants should provide the SBA with the political support to move the 504 refinance capability to the front of the agenda. To miss the window of opportunity presented by a lull in long term rates is a self-inflicted injury which our economy should not have to bear.
(1) Forsyth, Randall. “Declining Deficits Danger: Complacency on Entitlements.” Barron’s 9 April 2014.
(2) “Maturing CRE Loans: The Outlook for Refinancing.” Commercial Real Estate Research, December 2013. www.trepp.com Trepp, LLC
(3) Hamilton, Jesse. “US Banks to Face Tougher Leverage Caps than Competitors.” www.bloomberg.com 9 April 2014.
CMBS issuance chart is available from firstname.lastname@example.org