Moving Interest Rates for 2018

Today, the 10 Year Treasury is lower than it was a year ago; however, the short end of the Treasury curve is more expensive than it was a year ago

By RICHARD HILL ADAMS

The chairperson of the Federal Reserve Bank will lead the charge in moving interest rates up in 2018. We expect rate hikes to tighten financial conditions, mainly through higher U.S. Treasury yields. Based on the revised GDP (Gross Domestic Product) forecasts and the Fed’s balance-sheet reduction, the forecast has been increased for the 10 Year Treasury yield by half a percent—to 3.25 percent by the end of 2018.

Treasury Bills, credit markets, and interest rates moved up during 2017. Interest rates can go up or down, this has been the rule for decades; the question is how do you play the interest rates to carry the day. We have seen credit swaps and other esoteric methods of trying to hedge one’s bet in borrowing money to finance latest projects.

Today, the 10 Year Treasury is lower than it was a year ago; however, the short end of the Treasury curve is more expensive than it was a year ago. We’ve seen the Federal Reserve Board raise interest rates one more notch to the upside, which will have an effect on all interest rates in the market. The Prime Rate is at 4.5 percent today and 30-day LIBOR is 1.6 percent. Which index would you rather borrow money over for your next Construction Loan? I don’t think one gets to borrow over either index unless you are a very large builder with a very solid balance sheet, a good track record, and a lot of liquidity.

When it comes to Construction Lending in today’s market, it is difficult to find banks looking for new construction loans to put on the books. The regulators are still telling the banks they want them to hold a tight rein on High Velocity Commercial Real Estate Lending, due to the impact it would have on the banks’ balance sheet if there were to be a problem in the financial markets such as we experienced in 2008. In today’s world, we find Capital Market Companies providing very good alternative financing construction lending for the homebuilding market and the commercial market as well. Most Construction Loans are priced at prime +1.5 to 2 percent based upon the creditworthiness of the borrower, the amount of the equity invested, and the quality of the builder. On the other hand, the private mortgage capital companies are lending construction money at 8.5 percent, which, in reality, is 2 percent more than most of the banks. The loan process is also faster with less aggravation. Most banks will not make a land loan to allow you to process a map or the entitlement process, but there are private capital markets companies which will provide financing for developers to complete their entitlements on their latest projects.

Nothing is stayed in the complexities and the national and international movement of monies across the world, what happens in Frankfurt, Germany on Monday has an impact New York, Tuesday morning. The United States economy, according to Pres. Trump, will grow 4 percent next year. A number of major economists believe the GDP growth rate will be closer to 2 percent as we move forward through 2018. During 2017, inflation lagged other data, which has benefited the long-term securities market for Treasury Bills. The Labor Department noted that, excluding the volatile categories of food and energy, the CPI rose just 1/10 of 1 percent in November from the previous month and below economists’ estimates for a 2/10 of one percent increase. The reining in of inflation will help the economy and keep the interest rates lower than they would be otherwise.

China’s President has his own concerns regarding the capital markets, with improved economies in China and investment opportunities; the Chinese have moved to restrict people from transferring money out of the country and are looking to redirect that money into China’s own internal growth. The People’s Bank of China moved in mid-December to raise its Benchmark Interest Rate, which is its first interest rate increase since March 2017. This shows Chinese concern for capital outflows which previously had come to the United States and funded a number of large development projects with EB-5 money.

Watch how Congress rolls out the new tax bill, which will provide advantages and disadvantages for all Americans. Examine the impacts for your own companies and personal financial positions as we get a better understanding of Congress and the final impacts to the Trump federal tax regulations.

Richard Hill Adams is Chairman and CEO of American Realty Capital Advisors. He may be reached at RHADAMS@arca-money.com.

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