Day 28 of the Government shutdown is upon us, but who’s counting? Not the Equity Markets, as the early 2019 risk-on rally persists despite President Trump and House Speaker Pelosi grounding one another over each other’s accusation of not being able to play nice in the sandbox.
We can tell you who is counting, however, and that is the hundreds of thousands of Federal employees who continue to suffer through this mayhem of political uncertainty and will, unfortunately, be living without a hard-earned paycheck until who knows when. Despite all the craziness in DC, the markets have largely shrugged off the uncertainty and potential trickle-down effects that may lie ahead, perhaps weeks and months into the future, and instead are focusing on renewed optimism surrounding a Trade deal with China as well as the Fed signaling a pause on interest hikes sometime in the very near future.
Yup, the Government shutdown, political turmoil in London over Brexit, and slowing global economic growth can’t seem to pull the markets down right now. These factors have largely been ignored by most as the early 2019 Bull Run continues with the hopes of completely negating the late market swoon of 2018. To quote the great Louis Winthorpe III of Trading Places, “Buy low, sell high. Fear? That’s the other guy’s problem.”
Over the last three weeks, Equities have regained nearly 12% of recent losses. The positive mood has spilled across credit markets as well with corporate spreads and CDX tightening a significant amount to start the year ultimately spilling over to other asset-backed markets including where things really matter over here in Commercial Real Estate Finance. At the same time, Treasury yields have slowly been responding to the risk-on move in Equities, slowly climbing back to more respectable investor levels – unlike the respect the entitled/roller of an eye bagel cafe cashier showed me yesterday when I requested a slightly darker free plain bagel than presented to me to go with my overpriced salad.
This morning Equities are once again trading strong at the open following the overnight risk-on sentiment overseas and, as mentioned above, on renewed optimism that Trade talks with China are progressing extremely well with the potential for a Trade deal amicable for both sides possibly in the works in the near future. (Hear that Trump/Pelosi/Schumer? Deals can happen if you sit and negotiate and are willing to give, in order to get.)
Additionally, for those growth pundits watching, the latest numbers on domestic Industrial Production came in better than expected. Treasury yields are slightly higher across the curve following yesterday’s sell-off in rates with the 10-year UST currently trading in the 2.76% range, up roughly 6bps on the week.
The sudden steepening of the yield curve after months of flattening and talk of inversion – which in my humble and I think somewhat educated opinion, will still likely reverse course and invert sometime 3rd quarter 2019 – is in full play with the 2- to 10-year Treasury yield delta sitting at around 19bps, trying desperately to break thru a two handle on spread and crawl its way back to a normal steeper shape.
As it is conference season, it continues to be somewhat slow out of the gate on the Commercial Real Estate Finance side. This week, market participants, with exception to folks on the Hunt pricing desk for some reason, converged in South Florida for the Annual CREFC conference to talk everything Commercial Real Estate Finance. The mood out of the conference was mixed, with some concerned that rising political tensions and slowing economic growth may hamper production for 2019. Others were more bullish, expecting similar volume results compared to 2018 with flat to tighter spreads across all sectors of the Commercial Real Estate universe.
On the Agency CMBS side, Fannie Mae and Freddie Mac have certainly been huffing their ‘little sister status’ versus ‘big sister’ CMBS, as both mortgage giants reported 2018 volume numbers this week. Freddie Mac champed the leader board with a whopping $78B in volume while Fannie Mae played second fiddle at roughly $65B in volume (final exact number still TBD). My oh my, how the tides have turned. When combined with FHA, total Agency CMBS volume surpassed $150B in calendar year 2018, an astonishing number under any circumstances as the Agency world continues to play the role of Rocky Balboa as the underdog going the distance.
With things being slow to start the year, as expected, we continue to see a modest tightening of securitization spreads. AAA CMBS recent New Issue bonds are being offered H90’s to L100’s over swaps, a considerable difference from where we were a mere month ago and with the hope that tighter levels will be seen once the next New Issue Multi-borrower deal hits the market. On the heels of that, and with the lack of supply, primary Fannie Mae DUS and secondary Freddie K spreads continued their modest improvement this week, tightening 1-3bps across the curve. With the government shutdown prevailing, everything is at a virtual and complete standstill in the Ginnie Mae world, with little to no movement on deals rate locking or closing. Spreads at this point remain choppy given the dearth of activity and Treasury yields remaining sub 3%, causing coupon levels that are just too low to bear for the GNMA REMIC folk. At this point, GNMA spreads remain at 12-month wides with no movement expected, at least until our fearless leaders in DC hug it out once and for all and come to terms on a spending agreement to get this country moving again.
That’s all from us for now. Markets are closed Monday in observance of Martin Luther King Jr. Day. Have a terrific weekend.