What a 5.35% 10-year Treasury actually means for a daycare's building loan, an HVAC truck and a restaurant's landlord

The benchmark 10-year Treasury yield rose nearly 8 basis points to 5.35% on Wednesday morning, its highest level since 2002, and the 30-year reached 5.724%, a 24-year high, CNBC reported. The 10-year has risen about 60 basis points since the end of July, while U.S. crude is up 20% over the same stretch. We wrote about the 5% line earlier this month. What is new is the size of the move since summer and what it does to loans that were quoted before it.

The Treasury is selling $39 billion of 10-year notes today, with results due at 1 p.m. ET, and $22 billion of 30-year bonds on Thursday. We have not seen the auction result as this is written.

Which loans move, and which barely do

Most owners hear "yields are up" and assume every loan they have gets dearer. It does not work that way, and the difference decides who should worry.

• Credit lines and cards priced off prime follow the Fed's policy rate, not the 10-year. The Fed raised rates in September, and Realtor.com cites the CME FedWatch tool at about a 78% chance of no change at the end of October. A yield spike alone does not reprice them.
• Short equipment loans take their pricing from shorter maturities. The Treasury's October 6 close had the 5-year at 5.03% and the 7-year at 5.15%, below the 10-year at 5.27%.
• Long fixed-rate loans, building loans and refinancings price off the 7-year to 10-year range. This is where the 60 basis points lands.

The daycare owner with a building loan coming due

A daycare owner bought the building and has a $600,000 balance on a loan that ends in a balloon payment next spring. We assume the owner refinances over 25 years. At an assumed 6.75%, the payment is about $4,145 a month. If a rise of the same 60 basis points shows up in the quote, 7.35%, the payment is about $4,376.

That is $231 a month, or $2,772 a year, for the same building. A daycare has little room to pass cost on, since parents will not take a mid-year tuition increase well, so the $2,772 comes out of the owner's pay.

58,848 independent childcare and daycare are listed on CheckThisBiz, a directory of 7,704,724 independent US businesses, including 7,633 in CA, 4,565 in TX, 3,817 in NY. Chains and franchises are excluded from that count, so these are the owner-operated businesses that actually apply for funding.

The HVAC contractor buying a truck

Here the headline overstates the damage. Our HVAC playbook is written for a trade where a new van is routine. Financing $90,000 over five years at an assumed 6.9% costs about $1,778 a month. At 7.5%, about $1,803.

That is $25 a month, or about $1,500 over the whole loan. A contractor who delays buying a truck the business needs, to wait for yields to fall, can lose more than that in a single missed job. We cannot say that yields will not fall. We can say a short note is not where this move bites.

The restaurant owner and the landlord

A restaurant owner never sees the 10-year, but the landlord does. Suppose the landlord owns a ten-unit strip with a $2 million loan that resets this year. An extra 0.60 percentage point is $12,000 a year of interest on a $2 million balance, or about $1,200 per tenant. Landlords usually try to recover it at lease renewal, through base rent or the shared costs that tenants split.

An owner with a renewal in the next year can expect that conversation. Ask the landlord now when the building loan resets and use the answer to negotiate renewal terms early. Our earlier piece on 5% yields covers a repair shop and a dentist on the same mechanism.

605,380 independent restaurants are listed on CheckThisBiz, a directory of 7,704,724 independent US businesses, including 79,108 in CA, 54,058 in TX, 51,387 in NY. Chains and franchises are excluded from that count, so these are the owner-operated businesses that actually apply for funding.

What to do

1. List every fixed-rate loan with a maturity or reset in the next 18 months, and the date of each. The daycare example above is the type that is exposed. A loan that runs until 2030 at a fixed rate is not.
2. If a refinancing is coming, ask for a written quote today with a rate-lock option, and compare it with an extension of the current loan. The comparison costs nothing, and it is a decision about the month's payment, not a prediction of where yields go.
3. For equipment, do not delay a purchase the business needs over the move in yields. Test the payment at 1 point higher, as above.
4. If you have a lease renewal, find out when the landlord's loan resets and bring a number, not a complaint.
5. If none of these apply, the right move is to do nothing. A fixed-rate loan with years left is not affected by this week's yield.

For where yields stand, see the 10-year Treasury chart and the markets board.

Sources: CNBC; U.S. Treasury daily par yield curve; Realtor.com (citing CME FedWatch); CheckThisBiz business counts. Loan balances, rates and rents are illustrative assumptions and the arithmetic is the Chronicle's. This is market information, not investment advice.