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Health Care Borrowers May Need to Rethink Funding Strategy as Bond Yields Move Higher, Investment Banker Says
The recent rise in 10-year U.S. Treasury yields could provide an incentive for some senior housing/health care borrowers to rethink their long-term debt strategy, one expert believes.
Interest rates on popular FHA-insured HUD loans typically move up or down in tandem with yields on 10-year Treasury notes, says Jeffrey A. Davis, Chairman of Cambridge Realty Capital Companies. In recent weeks, rates on 10-year Treasuries have jumped from 4.84 percent to 5.14 percent, an increase of 300 basis points (a basis point is one/one-hundredth of one percent).
Because they're on a similar trajectory, HUD rates are also up about .30 percent, Davis says. On a $10 million loan, this roughly works out to about $30,000 per year, or $330,000 over 10 years, he notes. But the impact of the increase is even greater because it significantly impacts the potential loan proceeds available to a borrower, Davis says.
Davis says the higher bond yields partly reflect stronger than expected economic growth and have all but erased expectations that the Federal Reserve Board would trim the short-term interest rate it sets for overnight loans between banks, which has remained unchanged over the past 12 months at 5.25 percent.
Just a few months ago, investors seemed convinced that the falling housing demand would send the economy into a downturn, forcing the Fed to cut short-term interest rates several times. But this scenario now seems less likely based on data that showed the economy bouncing back in the second quarter with improved manufacturing output and healthy job growth, Davis says.
But long-term bond yields are not solely reflective of stronger aggregate demand in the U.S. Today's higher U.S. Treasury yields reflect developments in international markets as well.
Davis says central banks in Europe, Canada and other foreign markets have either raised interest rates or threatened to do so, and economists have identified other international factors that appear to be impacting the U.S. bond market. For example, the global savings glut that Fed Chairman Ben Bernanke has credited with helping to hold down interest rates may be lifting. And China has shown signs of shifting its massive foreign exchange reserves from U.S. Treasury bonds to riskier assets.
The point is that it's becoming increasingly more difficult to gauge how events might unfold in the bond market. Davis urges clients to review their debts and, when possible, to move from variable to fixed-rate financing.
Privately owned since its founding in 1983 as a real estate investment banker specializing in commercial real estate properties, Cambridge emerged in the 1990s as one of the nationís leading senior housing and healthcare debt and equity capital providers, closing more than 280 such transactions totaling more than $2 billion since then.