What a 5% 10-year yield actually means for a restaurant owner, a dentist and a machine shop buying a building

Tuesday's hot October inflation report and a hawkish speech from Fed Governor Christopher Waller pushed the 10-year Treasury yield up about 14 basis points to roughly 5.00%, CNBC reported. Treasury then sold $42 billion of new 10-year notes at 5.020%, up from 4.683% in August, according to TreasuryDirect (full detail in our auction report). Treasury's own daily curve had the yield at 4.88% at Monday's close.

Most coverage treats this as a bond story. For an owner it is a loan story, and it is a different one from the floating-rate line we covered earlier (what a half-point hike means for a contractor, a restaurant and a trucker). A line of credit follows the Fed's overnight rate. A long fixed-rate loan follows the 10-year.

Who is exposed, and who is not

Commercial mortgages and many long equipment financings are priced as a spread over a Treasury or swap rate of similar term, so they move when the 10-year moves, with the lender's spread added on top. We do not know your spread, so the arithmetic below uses made-up round rates. What it shows is the change, which comes mostly from the base rate: the move from August's auction yield to Tuesday's is 33.7 basis points, so we use 7.00% against 7.34%.

The monthly math

• A restaurant owner buying the building after years of renting borrows $1,000,000 over 20 years. At 7.00% the payment is about $7,753 a month. At 7.34% it is about $7,958. That is $205 a month, or about $2,465 a year, for the same building. Over 25 years the gap is about $218 a month.
• A dentist buying out a practice's equipment and fit-out finances $150,000 over five years. At 7.00% the payment is about $2,970 a month. At 7.34% it is about $2,994. The difference is only $24 a month. Short equipment loans barely care about 34 basis points; the term matters far more than the rate.
• A machine shop buying the unit it rents borrows $500,000 over 25 years. The same 34-basis-point rise adds about $109 a month, or roughly $1,310 a year.

The pattern is simple. The longer and larger the loan, the more the 10-year matters. A three- or five-year equipment loan hardly changes. A 20- to 25-year building loan changes by thousands of dollars a year.

For comparison, Freddie Mac's survey had the 30-year home mortgage rate at 7.18% for the week of November 5, down from 7.40% in October, per its published history. Home buyers are feeling this as well (Redfin's October report).

The thing the headline gets wrong

5.00% sounds like a record. It is not a new high: the 10-year peaked at 5.31% on October 5 in Treasury's series and has mostly traded between 4.84% and 5.05% since October 23. Our chart shows today's level about 6% below the October peak. If you were quoted a rate in early October, the market has actually moved in your favor since. If your quote dates from August, it has moved against you.

What to do

• If you are close to signing a long fixed-rate loan: ask whether the rate is locked or still floating until closing. A locked quote has the 34 basis points built in already. An unlocked one moves with Friday's wholesale inflation data. Do not rush because of one auction.
• If you are only thinking about buying: no decision is forced this week. The 10-year has sat in a range for about three weeks, and a December Fed hike is already being priced by markets, according to CNBC.
• If you have a short equipment loan to finance: do nothing different. The rate matters less than the term and the down payment.
• Compare against rent: work out whether 20 years of payments plus property tax and upkeep beat your lease. At a 7%+ rate, a lease with a renewal option is often the cheaper way to wait.

Our 10-year yield chart is updated live. If funding is part of the answer for your business, our restaurant funding page explains the options without quoting rates.

Sources: TreasuryDirect; U.S. Treasury daily par yield curve rates; CNBC; Freddie Mac. Loan payments use illustrative rates and standard amortization, are not quotes, and exclude fees, taxes and insurance. This is market information, not investment advice.