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SBA 504 Loan Interest Rate Report: June 2017

Jun 2017

The bonds that funded June's 20-year Small Business Administration (SBA) 504 loans decreased 7 basis points over last month, keeping the resulting effective interest rate (the all-in cost to a borrower) still close to a low historical level. Lower for longer has been the case for interest rates so far. Will it continue? Frank Keane, fiscal and selling agent for 504 funding securities, comments.

504 loans are funded by the sale of bonds (aka debentures) which are pooled and sold on Wall Street each month. Understanding the 504 Loan Interest Rate

The bonds that funded this month's 20-year 504 loans were sold to investors at 2.81%, resulting in a final effective interest rate of 4.59% for June for standard 504 loans. The 20-year effective interest rate for debt refinance loans is 4.63%.

The effective interest rate for 10-year standard 504 loans(which is set bimonthly) is 4.51% for May/June (a 30 basis point drop from March/April). The 10-year effective interest rate for debt refinance loans is 4.56%.

Frank Keane, fiscal and selling agent for 504 funding securities, commented following the June bond sale:

“On (June 8), $338,673,000 of 2017-20F was priced at a rate of 2.81%, 6 bps below the program's 6-month average rate through May.

“While not as low as before the presidential election, Treasury rates stubbornly remain low while equities are near all-time highs, the dollar has weakened 7% this year, and gold (another safe-haven investment like Treasuries) is on a tear.

“So, how does the Fed interpret all this? It seems they are totally focused on employment which appears to be strong, while tolerating the below target rate of inflation and that is why (a) rate increase is likely … Additionally, the ECB will need to address its Quantitative Easing program, just as the Fed will need to take action to reduce its $4.5 trillion Balance Sheet. Both initiatives have provided strong support for fixed-income securities and changes in policy will pressure rates to move higher.

“(The) FOMC acted as advertised (on June 14 with a quarter-point rate hike) and the market shrugged it off. In fact, the market rallied the morning of the rate increase in response to weak Consumer Price Index and Retail Sales reports, and then gave back some of that move later in the week.

“Leading up to (the June 14) announcement CPI came in-0.1%m/m and its core rate declined to +1.9% y/y. CPI is not the primary inflation indicator used by the Committee but that core rate is even lower, +1.5%. Retail Sales was-0.3%, a bit more negative than expected.

“To recap (the June 14 rate hike) announcement:

• This is the fourth-rate hike dating to December 2015, and the Committee projects one more this year, and three next year.

• Inflation is acknowledged to be lower than expected and the forecast does not expect a significant rise.

• GDP estimate for 2017 is 2.1% and then 2.0% in 2018.

• Longer run unemployment is projected to be 4.7%.

• A “taper tantrum” like in the summer of 2013 seems to have been avoided as the Committee provided more detail than expected regarding its portfolio reinvestment strategy, but no definite start date. The reduction will begin with $6 billion U.S. Treasuries and $4 billion Mortgage-backed securities monthly, to increase every quarter, rising to a maximum reduction of $30 billion per month for Treasuries and $20 billion per month for MBS. Mrs. Yellen commented that balance sheet levels will be reduced ‘appropriately below those seen in recent years ($4.5 trillion) but larger than before the financial crisis (≤$1 trillion).' Some Fed officials have speculated the final balance will be between $2-3 trillion.

“Essentially, the current environment pits Reflationists vs. Deflationists with the Fed being in the former camp and the market in the latter. The breakeven rate for ten-year Treasuries (a measure of the yield premium for ten-year Treasuries vs. the yield on ten-year Treasury Inflation Protected Securities) is 1.67%, meaning that is what the market expects inflation to be for the next ten-years. Last month, that premium was 1.82% and it is shaping up for inflation data to drive price action as the market is indicating we are in a low growth, low inflation situation,” Keane said.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms for the purchase of major fixed assets, such as owner-occupied commercial real estate and/or heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans and provide up to $5 million for standard and public policy projects (aggregate limit) and up to $5.5 million per green initiative and small manufacturer projects. These are SBA 2nd mortgage loan portions only; there isno limiton overall project dollar size.

For more information about SBA 504 loans in Florida, South Alabama or South Georgia,contact a Florida First Capital Loan Officer or email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.