By Jim Costello on April 30th, 2018
The 10yr US Treasury broke the 3% barrier last week. Does that necessarily mean that cap rates will surge?
As shown in the chart, there is no constant spread between cap rates and the 10yr UST. Lenders, in fact, have been absorbing some of the increases so far.
The spread between the 10yr UST and the average 7/10yr mortgage rate has compressed in recent months though still provides a margin for lenders. With lenders absorbing the 10yr UST increases to date, equity investors still have positive leverage in their investments with a historically wide spread between cap rates and the average 7/10 yr mortgage rate.
If, as many expect, the 10yr UST moves higher than 3%, these spreads need not remain constant. As they narrow, cap rates would go up less than any increases in the 10yr UST.