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Trumped Treasury and SBA 504 Loan Interest Rates: November 2016

Nov 2016

504 loans are funded by the sale of bonds which are pooled and sold on Wall Street each month. The bonds (aka debentures) that funded November's Small Business Administration (SBA) 504 loans saw a dramatic jump as pricing for the sale occurred the day following the presidential election.

504 loan rates still, however, remain very favorable for small business borrowers. But what about going forward? Frank Keane, fiscal and selling agent for Eagle Compliance, LLC - the entity responsible for marketing, pricing and selling 504 funding securities - provides insight.

Understanding the 504 Loan Interest Rate

Note: For FY 2017, program fees paid on Small Business Administration (SBA) 504 loans have decreased. The changes are applicable for loans approved on or after Oct. 1, 2016, through Sept. 30, 2017.

The bonds that funded this month's 20-year 504 loans were sold to investors at 2.57%, marking the 30th consecutive month the bond rate has remained below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.35% (reflects FY 2017 decreased fees) or 4.62% (FY 2016 fees) for November for standard 504 loans. The 20-year effective interest rate for debt refinance loans is 4.67% (FY 2016 fees).

The effective interest rate for 10-year standard 504 loans (which is set bimonthly) is 4.66% (FY 2016 fees) for November/December. The 10-year effective interest rate for debt refinance loans is 4.73% (FY 2016 fees).

Frank Keane, fiscal and selling agent for 504 funding securities, provided insight about the November bond sale and where 504 rates might go from here:

“On the day after the election, we saw market divergence as stocks rallied and bond yields surged, moving the benchmark 10-year Treasury yield dramatically higher, and increasing our 2016-20K to a rate 36 bps higher than in October. (That) jump in yield was the biggest one-day increase in three years, partly affected by an auction for $23 billion of the benchmark 10-year Treasury note, and strongly influenced by the president elect's intended infrastructure spending and tax cuts. The move to higher yield was then enhanced by (the) auction of $15 billion 30-year bonds and has continued … with CT-10 at 2.23% and the 30-year bond reaching 3.0% for the first time since January.

“Where to begin, and how soon?

“It is obligatory for newly elected presidents to have a 100-day plan and Mr. Trump's challenge will be how to prioritize his objectives:

• Immigration controls.

• Full, or at least, partial repeal of Dodd-Frank legislation.

• Dismantle Obamacare, at least most of it.

• Renegotiate foreign trade agreements.

• End the Federal Reserve Bank's cautious monetary policy.

• Fund the planned infrastructure stimulus.

“It is the last item that framed the recent move higher in rate and is also linked to Mr. Trump's criticism of Fed policy. Chairwoman Yellen has repeatedly advocated a gradual increase in rates, but legislative changes could challenge that approach. A key determinant will be how infrastructure spending is realized: an anticipated increase in Treasury funding contributed to last week's move but Trump advisors have proposed private equity can fund projects in exchange for significant tax breaks. That approach believes the loss of tax revenue would be recouped by increased taxes realized from construction workers, plus increased tax revenue from contractors.

“And then there is the `deemed repatriation` of foreign profits, as much as $2.5 trillion. Relaxing the current tax rate on that could account for at least some of the required spending. It is important to note that infrastructure projects take considerable time to plan and initiate and most are done at the state and local level, making federal involvement even more complex and time consuming.

“Although the Fed's PCE (personal consumption expenditures) model of inflation remains below its 2% target, fiscal stimulus in a tight labor market can result in inflation which, in turn, is harmful to bond investors. The type of inflation that could result is called “demand-pull” because it occurs when there is too much spending in an economy that can produce only so many goods and services.

“Yields have moved sharply higher twice in the last three years, only to reverse course when conditions did not sustain economic improvement. It is improbable that we revisit dramatically lower rates and structural change is still many months away, but market sentiment has definitely shifted due to Mr. Trump's mix of economic stimulus and protectionism that is expected to foster faster growth and inflation. With 10-year yields 50 bps higher than one month ago, the market has already priced in more than next month's anticipated rate hike and steepened the curve, so we should see some stability, but that will be influenced by the new administration's announcements,” 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 is no limit on overall project dollar size.

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