The G-20 summit is now off and running as all eyes have shifted from two pulsating nights of Democratic Presidential debates, where everything from free healthcare to free education to free apple juice was pushed by all the esteemed candidates vying for the Democratic nomination in 2020. If you had the misfortune of missing the debates and wish to view an encore, simply YouTube the Turbo Tax “Free Free Free” commercial and that should sum it all up.
G-d Bless America. Either way, politics aside (or maybe not), the G-20 summit this year is of particular interest to all. The long awaited meeting scheduled for tomorrow between President Trump and Chinese President Xi remains front and center on everyone’s radar as the two fearless leaders attempt to hash their differences and resolve this never ending Trade War. Aside from the two folks at the forefront, no one really knows what will be said and what the outcome may be. However, what we do know is there will likely be no filter on either side of the aisle, and any leak of information is likely to have some form of an impact on global markets.
While global Central Banks and the Fed have captivated markets over the last few weeks and dominated the headlines, this weekend’s trade talk is set to upstage and regain the upper hand – at least temporarily – just like George gained the upper hand after knocking out Biff on November 12, 1955 outside the Enchantment Under the Sea Dance (if you don’t know which movie I am quoting, we can no longer be friends).
Speaking of the Fed, did they ever confuse things this week, or what? After all the excitement stemming from last week’s positive vibes regarding potential imminent rate cuts, Powell and Co. seemed to backtrack, or better yet, “clarify” this week that a 50bps rate cut may be too much if anything at all, and July may be way too early for the Fed to act. So right now us common market folk sit patiently on this final trading day of the 1st half / 2nd quarter of 2019 focusing on the summit, wondering whether the markets will be looking to comfortably ride like Rickey Shroder/Stratten’s living room train (yes, that’s a Silver Spoons reference) or whether things will once again get a bit bumpy like Prince Oberyn’s fight against The Mountain.
This morning Treasury yields are mostly flat with Stock futures pointing higher as the G-20 Summit takes center stage. Call it a slightly optimistic to somewhat cautious approach on the heels of the pending trade talk, particularly as investors look to close the books on the 2nd quarter today. As of this writing, the 10-year Treasury was yielding 2.02%, and continuously flirting with that 1% handle. The 2-year treasury was trading in at 1.76%, with minor movement in the shape of the yield curve on a week over week basis.
As we close out the 2nd quarter things remain quite busy on the Commercial Real Estate end, with Treasury and Swap yields to thank. With 2% now the new normal coupled with minimal impact on spreads in a surprisingly accepting market, many lender pipelines have bulked up all along with the need to get deals done quickly and efficiently.
While volume was light on the CMBS end this past week with just one conduit deal pricing in the market, GSMS 2019-GC40 from Goldman, Citi, and DB, volume on the Agency CMBS front, particularly in FNMA DUS, was strong with lenders looking to get as many deals locked as possible prior to the end of the quarter. At the same time, talk of increasing pipelines and borrower refinances continues to gain steam as lenders near and far are gearing up for what may be a banner 2nd half of 2019. The A4 10-year average life bond on the GSMS deal priced in at swaps plus 87bps, which is a far cry from the comparable bond on the CSAIL transaction which priced in last week at swaps plus 100bps. Of course, there is a bit more to it than meets the eye as collateral quality as well as the fact that CMBS investors continue to push back on deals where a majority of the collateral may not be originated from some of the bigger shops, as was the case in the CSAIL deal versus GSMS.
Meanwhile spreads over swaps in Agency CMBS were pretty stable throughout the week. There was no new issuance of note on the Freddie Mac side. In DUS, over $1B of new issuance hit the market and was scooped up with relative consistency. We continue to see tiering based on loan size with loans below $5M at higher premium levels getting hit at significantly wider spreads in the market, continuously making life more and more difficult for us Small Balance brethren. For your traditional 10/9.5 we would call spreads over swaps in the low to mid 60s with small balance deals 5-10bps wider from there.
On the GNMA front, it was quiet this past week with spreads in the 104-108 price bucket remaining somewhat stable while coupon levels below 104, particularly in the 100-102 bucket having almost nowhere to go. With Treasury and Swap yields falling so far and so fast, most investors have imposed yield floors on the product, and given the market for spreads a par to 102 bond in GNMA land is almost as hard to achieve as digging a tunnel through a wall with a rock hammer to escape from prison.
With the 4th upon us next Thursday (can’t come soon enough) we expect limited liquidity throughout next week, particularly on Wednesday which has an early market close and Friday (markets closed Thursday), as many market participants will look to take an extended vacation to round out the holiday. Outside of that, there is nothing else new to report on our end. It’s going to be a hot one this weekend here in NYC. Have a terrific weekend and a great 4th!