Prime Rate Vs. Ten Year Treasury Rate

[treefly]

Not sure if this is the correct part of the forum, but thought it was close at least!

I have a HELOC that is set to the Prime Rate +1%, and I was looking at the investment order directives, which say that you should pay off anything 5% above the 10-yr Treasury Rate, and I was hoping y'all could help me understand how those are related.

Will the PR+1% always be lower than the 10yr+5%?

[ChpBstrd]

The relationship between those variables will NOT be anything like linear. The Prime Rate is based on adding 3% to the Federal Funds Rate. However the spread between the FFR and the 10y treasury yield varies a LOT! I created the following chart by adding 4 to the FFR to make it equal the Prime Rate+1, and charting it alongside the 10y treasury yield.


https://fred.stlouisfed.org/graph/?g=Vmz8

There was a 5% or greater difference in 1969-79, 1973-74, and 1980-81. So the answer is NO, PR+1% will NOT always be lower than 10yr+5%. However it is very rare for the gap to grow this wide - probably not worth watching for.

[treefly]

Thanks for the info @ChpBstrd, would it make mathematical sense for me to carry this debt until closer to retirement then?

[ChpBstrd]

Thanks for the info @ChpBstrd, would it make mathematical sense for me to carry this debt until closer to retirement then?

Key to this puzzle is the realization that your HELOC is variable rate but (let's assume) your best alternative investment to paying off the HELOC is US Treasuries which can have a fixed rate up to 30 years. So your ideal move is to buy treasuries with the money from the HELOC if you think rates are going down, and to pay off the HELOC if you think rates are going up. If you buy treasuries and rates go down, your investment will appreciate. If rates go up instead, treasuries can lose a lot!