published Feb.13, 2025

Mixed Lender Sentiments

The Fed has been focused on getting inflation down, and with January inflation coming in above 3%, treasuries have remained elevated in the mid-4%'s and expected to gradually increase from here.  We've seen the largest discrepancies in loan quotes from lenders in several years.  Some lenders are optimistic and leaning in with spreads in the 150-220 range for permanent debt, while others remain cautious and are effectively pricing themselves out of the market with spreads in the 250-325 range.  Casting a wide net to find the outlier lender has become more important than ever.

Regarding index rates, we are in the all-to-familiar cycle of "bad news is good news" and vice versa.  If unemployment jumps, that would apply downward pressure on inflation, and open the door for the Fed to take a quicker path towards rate cuts.  Absent that, this rate environment seems to be the new normal for the foreseeable future.  The Fed doesn’t expect inflation to reach its' target of 2% until the end of 2026, meaning they are not in any hurry to cut rates quickly, if at all.  The market has an 83.5% probability that rates will remain the same through the Fed's May meeting, with a 16% chance of a cut.  

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The forward curve graph below gives a picture of the market's projection on short term rates (Term SOFR) versus treasury rates.  With fixed and floating rate options pricing much more closely today, we've explored floaters with rate caps.  The benefit of buying a floating rate cap with an "at-the-money" strike is that you’re putting a ceiling near the fixed rate equivalent while retaining both prepay flexibility and the ability to float lower.  We are also exploring floating rates where we are swapping to a fixed rate for the front-end of the loan term, with the back-end of the term floating with open prepay.

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