As the Yield Curve Steepens: Fixed vs Floating Rate

[Spencer Gray]

I've always been a big believer in long term, fixed rate debt - and I still am. What's better than eliminating interest rate risk on a deal for 5, 10, 12, or 35 years in the case of a HUD 223(f)?

That being said, as the yield curve steepens, variable based rates indexed to shorter maturity notes have the potential to stay much lower for quite some time with the Fed having more influence on these than longer term notes. Fixed rate debt, which is typically indexed off the the 10 year treasury, that has risen significantly the last few months, nearing back to pre-pandemic levels. While lenders can adjust their spreads to keep actual borrowing rates competitive for a while, eventually real borrowing rates will rise as well. 

This is a different environment than the past few years when the spread between the shorter and longer term bonds was very tight, even inverted. That is no longer is the case.

I still think locking in historically low fixed rate debt is a no-brainer in this environment, but am curious if others are using, or considering utilizing variable rate debt to take advantage of even lower rates to drive your return?