Bond yields have been all over the news this week.
They’ve been rising recently — because of inflation, for one, and expectations that it will prompt the Fed to keep interest rates higher for longer. Plus all of that debt that the government keeps piling on, as Greg Ip told “Marketplace” on Thursday.
All of that is important because bond yields affect the cost of all kinds of borrowing throughout the economy.
The average rate on 30-year mortgages is at its highest in almost a year, according to the government-backed mortgage company Freddie Mac. And business loans could be headed upward, too — but there’s no equivalent to Freddie Mac for them.
Business loans don’t work exactly the same way mortgages do. The interest rate on a mortgage is typically fixed — for 30 years. But the rate on a business loan changes — pretty frequently.
“So, I can have a 5-year term on a loan, with an interest rate that changes every year,” said Chris Duncan, chief lending officer at La Salle State Bank in Illinois. “[Business loans] aren’t directly tied to long-term Treasuries … the way mortgages are.”
Instead, they’re often tied to something called the prime rate, which closely tracks what the Federal Reserve does.
“So, when the Fed comes in, and they raise the rate, you’ll see that prime rate will move,” Duncan said. “When they lower their rate, that prime rate moves down. So that’s a very direct correlation.”
Duncan said at his bank, interest on business loans haven’t changed much over the last few months, because the Fed has held rates steady. But Duncan thinks they’re headed up.
“And that’s getting forced by inflation, and all the factors that the Federal Open Market Committee has to take into consideration,” he said.
Business loans could also rise because banks might have to start paying more interest to depositors.
“Particularly if we see the Fed raise interest rates to calm inflation, you’ll see some deposit interest rates move,” said David Reiling, CEO of Sunrise Banks in Minnesota.
Reiling said rates on business loans are especially sensitive to interest on deposits, since banks use those deposits to make those loans.
“So the higher those deposit costs are going to be, the higher the loan rates are going to be for small business customers,” he said.
But it’s not a great time for business loans to get more expensive.
”What I’m seeing here in rural Alabama and northeast Mississippi, is our borrowers are really being hampered by higher energy costs,” said Brad Bolton, CEO of Community Spirit Bank in Red Bay, Alabama.
Bolton said many of his borrowers are in the timber and trucking industries, both of which consume a lot of fuel. So, he has been working with his borrowers to extend loan terms and reduce monthly payments.
“Maybe you’re having to stretch that term out to 60 months, instead of where you’d normally finance it for 48, just to keep the payment manageable for that small business owner,” Bolton said.
And keeping payments manageable helps the bank keep its customers.