Forward Curve

The Fed controls one rate - the overnight discount rate. Short term t-bills have extremely high correlation to Fed cuts. They are essentially just priced in Fed futures based on the duration of bill you are looking at. If the Fed said we will cut on 10/1/24 by 25 basis points and hold it there for the rest of the year, 3-month bills issued on 10/1/24 would be exactly that new Fed funds rate.

The markets for notes and bonds are much more complicated. They depend much more on factors that are harder to estimate like long term economic growth, inflation expectations, and also Fed funds over the next 2/5/10/30 years. Therefore, the correlation to Fed Funds and Treasury bond rates is much weaker. The longer the duration of the bond you are looking at, the weaker the correlation. 

The bond market controls the long end - 5 years+. If Fed Funds is at 5.5% like it is now, and the 5-year is at 3.41%, the bond market is pricing in 5 years of activity by the Fed to come out to be a discounted rate today of 3.41%. Theoretically, floating rate debt for 5 years and buying a 5 year note should be priced to perfection - if you believe the market, you will come out even whether you "ride the curve" or just buy a 5 year note and sit around.

forward curve has never been right. not helpful for your question at all but just a comment. 

The curve swings violently all the time...one thing that is clear is that the Fed is always behind the bond market. If you study history the bond market is almost always right (vs the Fed and equities). The bond market is pricing in several cuts over the next year...their exact cadence/timing is a crap shoot as always is with the fed - the only thing that would change this in the coming months is exceptionally strong economic & employment data unfolding, which would reshift focus from labor market back to inflation. 

Good explanation.  

For non CMBS perm financing, do banks and lifecos also quote as a spread over UST? 

Is quoting over UST generally reserved for fixed rate debt only?  If I am a borrower seeking a five year fixed rate loan, should I expect meaningful prepayment penalties similar to CMBS?  I have seen bank loans (5 year fixed) with step down prepayment 5/5/3/2/1, or 3/2/1/0/0.  If rates drop, then it's easier for borrower to stomach a prepay and refinance into a cheaper cost of debt, but doesn't this mean the lender get the short end of the deal?

On a floating to fixed swap, assuming the borrower wants to swap using 5 year SOFR swap, does that mean that an early prepay means breaking swap and basically a yield maintenance type prepayment penalty?

No clue. But if you look at any historical projection of the forward curve, it’s always wrong. Go to Chatham Financial and look at the “Hairy Chart.” This shows where they thought the curve would be vs where it actually went. Never right. Point being - don’t think too hard about this. You’re a real estate investor not a macro trader. Swap, cap, and collar your debt and you’ll be fine.