The 10-year Swap Rate (Swap), the index used to set the interest rate for CMBS conduit loans, recently widened and is now above its 2013 range. For most of 2013 to date, the Swap has traded within a range of 1.80%-2.10%, but the Swap closed at 2.17% on May 27, the highest level so far this year.
Industry pros are suggesting that the trend of rising rates relates to concerns regarding comments made by Federal Reserve Chairman Ben Bernanke; he said that the central bank could begin tapering its bond-buying program in the next few meetings if there are signs of sustained gains in the economy. New York Federal Reserve Bank President William Dudley said on Wednesday, May 22, that Fed officials could reach a decision on quantitative easing in the next three or four months. Earlier this month, the “Wall Street Journal” reported Fed officials were discussing the winding down of the $85-billion monthly bond-buying program, though the timing was still being debated.
“Historically, the government has not tended to phase in policy changes over very long periods of time, and as a result, markets have been dislocated,” said Michael D. Sneden, Executive Vice President at ValueXpress. “Does anyone remember the Tax Reform Act of 1986, which wiped away tax advantages from depreciation? Real estate values plummeted 30% overnight and the Savings & Loan banking crisis of 1989 was a result,” said Sneden. “Had the government phased in the changes over a 5- or 10-year period, the crisis could have been averted.”
Now the government is a bit smarter, but with the ability to transmit information at a moment’s notice through the internet and the ability for markets to immediately trade on the slightest information, even if the Federal Reserve tapers its bond buying by $1, watch out.