On Thursday, April 2, the 10-year swap rate once again fell below 2.0%, after Labor Department data showed U.S. employers added the fewest jobs in March in more than a year. The rise of 126,000 jobs was well below expectations for a gain of 245,000 forecast by economists. Prior to Thursday, the 10-year swap rate had risen to trade in a range of 2.07%-2.35% during February and March, after touching a 2015 low of 1.82% on January 30.
The weak jobs report is clouding the timing of the Federal Reserve’s interest rate hike, which would be its first in nearly a decade, and for now, policymakers must watch that the U.S. economy’s surprising recent weakness does not signal a more substantial slowdown. As a result, the 10-year swap rate may trade around 2% for longer than anticipated.
In sympathy, the benchmark AAA-rated class of CMBS has risen in excess of 90 basis points (bp) over swaps from 86-88 bp as the decline in the 10-year swap rate requires dealers to increase spreads to provide CMBS investors a minimum return. However, CMBS conduit originators are not passing this increase to borrowers, at least not yet, as intense competition is holding rate increases to borrowers in check and CMBS conduit originators are earning less profit.
“The surprise decline in the 10-year swap rate and the potential for a longer period before borrower rates increase are a boon to borrowers as rates are declining to the 4% level for a 10-year fixed-rate CMBS conduit loan,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “This has helped a few procrastinators who are moving a little slower than expected.”