The Federal Reserve raised its key interest rate on Wednesday, December 16 from a range of 0.00%-0.25% to a range of 0.25%-0.50%. The move was widely expected. It is a sign of how much the economy has healed since the Great Recession. The central bank believes the U.S. economy is strong now and no longer needs crutches and that the move “marks the end of an extraordinary period” of low rates designed to boost the recovery from the Great Recession.
The 10-year Swap Rate, important to CMBS conduit loan borrowers because the Swap Rate is the index used to set the interest rate on CMBS conduit loans, remained stable after the announcement in the 2.15% area. CMBS conduit loan borrowers breathed a sigh of relief, as many believe there is a close relationship between Federal Reserve rate increases and CMBS conduit loan rate increases. In reality, the Federal Reserve adjusts short-term interest rates, which do not directly impact long-term interest rates, and the rate action on Wednesday proved to be the case. In fact, the 10-year Swap Rate has been remarkably stable over the past three months, ranging from roughly 2.00% to 2.30%. Stability is highly desired in CMBS conduit lending since the interest rate is set for a fixed period (typically 10 years) at closing and borrowers are subject to rate fluctuation during the 45-day loan underwriting and closing period.
Although Swap rates have been stable, interest rates have been rising for CMBS conduit borrowers. This is because the Swap rate only represents roughly half of the index to set a CMBS conduit loan rate. The other index, the Loan Spread, has been rising, resulting in an overall increase in CMBS conduit rates. For discussion on this topic, see 12.11.15: Borrowers Want to Know: Why Are CMBS Conduit Loan Spreads Going Up!