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Treasuries “Hang Out” at 3.00%, Loan Coupons Still Sub 5.00%

Today’s auction of $25 billion of 10 year treasuries was closely watched to see if the yield would hit 3.00%, a key psychological level. The closing yield was 2.995%, so very close. The 10 year yield is seeing upward pressure from the recent US withdrawal from the Iran nuclear agreement as the market sees this as inflationary. Oil is firming up at a $70 per barrel figure for the first time since 2014 (when it slid down from a high of $110). The return of inflation is now an accepted reality, the 10 year yield trading tightly around 3.00% indicates the markets are looking for direction (data that will yield confirmation or possibly confusion). Last week’s employment report was very “Goldilocks” with tight unemployment but it was due to a smaller labor force and wage growth was tepid. Tomorrow’s consumer inflation report, if inflationary, could push yields above the recent key technical level of 3.03%. The CMBS market remains robust, with some recent widening due to underwriting dynamics in particular pools, not overall sentiment. Spreads for full leverage loans are about 1.70-1.80, so coupons are creeping up towards 5.00%. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners