Credit Spreads: The Other Half of the Interest Rate Equation – May 2
This builds on a recent article I shared about Treasury market volatility. In loan pricing, the benchmark yield only tells half the story—and the other half is just as important.
Interest rates are composed of two key components: a benchmark rate (typically a Treasury yield) and a credit spread. The spread represents the risk premium a lender demands above the risk-free rate to compensate for things like borrower credit, asset quality, market volatility, and illiquidity. Together, these two elements make up the full borrowing cost—and when either leg moves, so does pricing.
Spreads in Motion: What’s Driving Today’s Shift in Pricing
Earlier this month, as Treasury yields whipsawed on the back of trade tensions and geopolitical concerns, we started to see movement in spreads as well. All lenders—banks, credit unions, CMBS, life insurance companies (LifeCos), Fannie & Freddie, debt funds—build in a “credit spread” when quoting pricing, even if they don’t break it out explicitly. That spread reflects the return they need over the risk-free rate to account for perceived risk.
For clarity, let’s focus on LifeCo lenders—our primary capital source and an area where we maintain direct correspondent relationships.
These lenders are typically among the most stable and disciplined in the market, especially during periods of volatility. That said, they’re not immune to broader shifts in sentiment.
How Lenders Price Risk—and Why It’s Moving
LifeCos tend to use investment-grade corporate bonds as a benchmark when pricing spreads. If corporate bond yields widen due to perceived market risk, LifeCos will often follow suit to maintain relative value.
In plain terms: they’re comparing what they can earn on a real estate loan versus a corporate bond. If corporate bonds suddenly start paying more, LifeCo spreads need to increase too—even if the underlying real estate deal hasn’t changed.
And right now, perceived risk is high. The current economic climate— marked by sticky inflation, global trade uncertainty, and shifting monetary policy—has many companies operating more cautiously. That same caution trickles up to investors, who demand greater yield for taking on credit exposure in an uncertain environment. Even if fundamentals at the property level look solid, lenders are pricing the macro backdrop into their spreads.
That’s exactly what we saw in early April, when spreads widened by 10– 25 basis points across many LifeCo platforms. Since then, as corporate bond spreads stabilized and Treasury yields settled, pricing has started to trend back toward more normalized levels.
A Broader Market Shift
This shift in sentiment hasn’t been limited to the LifeCo space. According to Trepp data cited by GlobeSt, spreads widened across all major commercial property types between March 21 and April 11. Multifamily spreads rose from 150.2 to 159.3 basis points, and office spreads climbed from 203.8 to 213.8 bps. It’s a pattern we’ve seen
before—most notably in early COVID—when uncertainty made it hard to assess risk and spreads surged even while benchmark rates fell.
Banks have followed a similar path. Over the past few weeks, both national and regional banks have widened loan spreads by 10–30 basis points or more, depending on asset class, leverage, and sponsor profile. Money-center banks made more modest moves, but many regional banks—especially those with higher CRE exposure—tightened up quickly. We’ve seen deals shift 15–20 bps week over week with no material change in sponsor or structure.
The drivers? A mix of tariff-driven inflation concerns, softening fundamentals, and broader credit tightening. Capital hasn’t disappeared—but it’s being priced with more caution.
That dynamic still holds: when conditions shift quickly, bond buyers and lenders alike need time to recalibrate how they assess and price risk. In those moments, spreads widen—even if base rates are falling.
Today’s Market: Where Spreads Stand Now
As of now, with Treasury yields having leveled out and the tone around trade and inflation softening a bit, we’ve seen LifeCo spreads begin to compress again. Most lenders we’ve spoken with are quoting in the 140–225 basis point range for moderate-leverage deals, depending on asset type and market. Spreads can dip below that for certain property types or lenders offering buydowns.
Understanding both sides of the rate—benchmark and spread—is essential to evaluating loan options. While headlines zero in on the Fed or the 10-Year, it’s the quieter shifts in spreads that often tell the real story.
What does all this mean for borrowers today?
The past month has been a clear reminder: credit spreads are a living, breathing gauge of lender sentiment. Even as the Fed holds or cuts rates, borrowing costs can rise when spreads move independently. And right now, lenders are approaching the market with more caution—not pulling back, but recalibrating.
LifeCos remain a steady hand, but they’re still competing with other fixed-income alternatives—so when bond yields rise, loan spreads follow. Banks are active, but they’re pricing tighter and scrutinizing deals more closely. Agencies remain aggressive where debt coverage and affordability align. And CMBS? The market’s back and active—but execution is still highly sensitive to investor sentiment and bond pricing.
The good news: strong sponsors with well-structured deals can still win favorable terms. But we’re not in a market of uniformly tight spreads anymore.
So yes—capital is still flowing. Just more thoughtfully than before.
To better navigate the complexities of loan pricing and identify the most advantageous financing options for your next project, give me a call for a personalized consultation. I’m here to help you make informed decisions in a shifting market.
Charlie Kokernak, Director
Gantry, Inc.
(503) 820-2943 Direct
ckokernak@gantryinc.com
Click here to read Part I of this Article
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