An important method that’s often used when evaluating interest rates is the analysis of any yield fluctuations in the 10-year Treasury note. This method is used because as yields for the note move up and down so do interest rates for other 10 – 15 year loans, such as 15-year fixed mortgage loans. Going into the year the expectation was that interest rates would rise markedly as the economy picked up steam and the Federal Reserve (Fed) began to pull back its stimulus measures by winding down its quantitative easing program (QE3) and increasing its benchmark federal funds rate (fed funds) from the 0% to .25% level that it has been at since 2008. While the Fed has begun to wind down its QE3 program, it hasn’t raised the fed funds rates and most economists don’t expect it to do so until sometime during the middle of next year. However, even with the winding down of QE3, interest rates continue to remain low, including the rate on the 10-year Treasury note. While this remains the case, senior housing providers who are interested in obtaining inexpensive capital for growth or other needs should contact the Chicago-based financing firm Cambridge Realty Capital to learn more about the many different financing options that it offers.
From a yield of roughly 3.00% at the start of the year, the 10-year Treasury note has fallen to between 2.50% and 2.55% during the past week. Because of the inverse relationship between the note’s yield and its price on the open market, as its yield has fallen, its price has increased. This means that demand for the note has also increased and there are many theories floating around as to why this is. Some analysts believe that rising tensions in Europe brought on largely by Russia’s actions in Ukraine are making the safety of Treasury securities more attractive to investors. Other analysts believe that investors think the stock market might be overvalued and are shifting some funds into treasury securities for this reason. But perhaps the main reason demand for the note has increased and its yield has fallen is because of growing expectations that the Fed will keep the fed funds rate low for a prolonged period of time.
In addition to impacting short-term interest rates, it’s becoming increasingly clear that the fed funds rate also impacts the yield on the 10-year Treasury note. A theory that’s gaining traction amongst analysts is that investors are starting to believe that regardless of when the Fed decides to raise the fed funds rate, it will still keep it low relative to historical norms. Investors’ expectations of the yield on the 10-year Treasury note is much different if they expect the fed funds rate to be 2%, than if they expect it to be 4%. Therefore, a drop in yields for the 10-year Treasury since the start of the year could mean that the market believes we may be entering a “new normal” in which the fed funds rate is kept lower than its historical norms for a prolonged period of time. The Fed itself said as much with its statement in March that “Even after employment and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the Committee views as normal in the long run.” As long as this is the case it’s likely that the yield on the 10-year Treasury note will also remain low relative to historical norms.
This is good news for senior housing providers who are interested in obtaining financing for growth or other purposes. However, it’s important to keep in mind that the yield on the 10-year Treasury is also affected by other factors besides the fed funds rate such as changes in the stock market and economic shocks in foreign countries. Accordingly, while the yield on the 10-year Treasury note and interest rates on loans that are associated with it remain low, senior housing providers who are interested in obtaining financing for growth or other purposes should take advantage of this situation and continue to look to the successful financing firm Cambridge Realty Capital for their capital needs.
