By Nidhi Thakkar, Audit Manager, Sherbert CPA, PC, nthakkar@sherbertcpa.com
Recent market shifts have cast a spotlight on a pressing issue for homebuyers as well as businesses. The 10-year Treasury yield recently fell by more than 30 basis points, signaling potential relief in borrowing costs. But the volatility continues as the yield subsequently went back up. Overall, high interest rates and economic uncertainties continue to create challenges for completing projects and securing financing.
Understanding the Basics
The 10-year Treasury yield is the return on U.S. government debt obligations that mature in ten years. It’s a key benchmark for many interest rates and serves as a crucial indicator of economic and market health.
The 10-year Treasury yield affects mortgage rates because both are long-term financial instruments. To stay competitive, lenders adjust mortgage rates based on Treasury yields.
- When the yield rises, lenders increase mortgage rates to match higher returns on Treasury investments.
- When the yield falls, mortgage rates typically drop, benefiting borrowers by lowering loan costs.
The Trump administration is focusing heavily on reducing both bond yields and interest rates to stimulate economic growth. Policies aimed at deregulation, tax cuts, and energy dominance are designed to create a favorable environment for lower long-term borrowing costs. Additionally, the administration frequently called on the Federal Reserve to cut interest rates further, arguing that lower rates would boost investment and economic activity.
While these efforts contributed to a temporary decline in long-term rates, the broader economic challenges such as inflation and global trade tensions are complicating the picture. The administration’s push for lower rates highlights the delicate balance between policy goals and market realities.
The Bigger Picture: Challenges for Project Financing
When the 10-year Treasury yield falls, it often leads to lower borrowing costs for businesses and consumers. This could, in theory, make it easier for projects to secure financing. However, the current environment of high interest rates and economic caution complicates the picture. Even with a falling yield, lenders may remain hesitant to fund projects due to concerns about economic growth, inflation, or potential recession risks.
For businesses, the cost of capital remains a critical factor. High interest rates have already made it difficult for many projects to move forward, as the return on investment must be significantly higher to justify the borrowing costs. A falling Treasury yield might provide some relief, but it may not be enough to offset the broader challenges posed by the current economic climate.
How to Overcome Financing Obstacles
Navigating the challenges of high interest rates and economic uncertainty requires creative approaches, especially in project financing. Tax credit programs can serve as vital tools to reduce costs and incentivize investments. Here are some key options to consider:
Low-Income Housing Tax Credit (LIHTC): This federal program encourages the construction and rehabilitation of affordable housing by offering tax credits to developers. These credits can significantly reduce the financial burden while addressing housing needs for lower-income families.
Historic Tax Credits: Aimed at preserving culturally significant structures, this program provides tax incentives for restoring historic buildings. It’s a win-win for developers and communities, fostering economic growth while maintaining architectural heritage.
New Markets Tax Credits: Designed to stimulate economic growth in distressed areas, these credits are available to investors who support businesses and real estate developments in qualified low-income communities.
Opportunity Zones: By investing in designated Opportunity Zones, businesses and individuals can take advantage of capital gains tax incentives. This program aims to attract long-term investment in areas needing economic renewal.
State Tax Credits: Many states provide their own tax credit programs tailored to specific needs, such as renewable energy projects, affordable housing, or job creation efforts. These programs vary widely and can complement federal incentives.
By leveraging these tax credits, businesses and developers can reduce project costs, attract investment, and overcome some of the financial hurdles associated with current market conditions.
Conclusion
While recent drops in Treasury yields may offer a glimmer of hope, they are far from a game-changer. Unlocking true relief for businesses depends on leveraging all available resources, including tax credits and specialized financing strategies.
The Sherbert Group is here to guide you through these complexities. We provide comprehensive support in securing financing, navigating tax credit programs such as LIHTC, historic tax credits, new markets tax credits, Opportunity Zones, and state-specific incentives, and connecting businesses with lenders. Let us be your partner in transforming financial challenges into opportunities for growth and success.