NEW YORK, NY – July 20, 2018
The question of whether President Trump said, or meant to say, ‘would’ or ‘wouldn’t’ earlier this week didn’t faze the markets whatsoever. In fact, the usual suspects of issues – trade wars, North Korea, turmoil in the Middle East, and meltdowns in a number of EU nations – for once didn’t play much of a factor in the market this week. From a market perspective, it was back to the basics as Q2 earnings season directed the markets, helping to bring the DOW back above 25,000 and the S&P to over 2,800.
A Shift in the Markets
Yet, somehow things began to turn around yesterday. The markets reacted negatively to the President’s harsh words directed at the Federal Reserve and their stance on Interest Rate hikes, claiming that further hikes will only have a negative impact on the economic accomplishments the administration has made.
This morning, equity markets are looking somewhat volatile. Trade wars have once again taken center stage, with the President reiterating his willingness and readiness to slap tariffs on $500B of Chinese goods. With the momentum we saw in the markets earlier this week, most market participants would like folks to “pay no attention to that man behind the curtain!” However, the bottom line is that geopolitical events in Washington, whenever possible, will always play a role in the markets no matter how much we hope the opposite.
For much of the week, long-term Treasury yields have remained consistent, with the 10-year yield spending its time in the mid-2.80s and the 30-year in the mid- to high-2.90’s. The fear of an impending yield curve inversion continues to weigh on the hearts and minds of many, as the 2- to 10-year delta is now at the flattest point since the curve inverted back in 2006. As of writing this commentary, the spread between the 2- and 10-year Treasuries is currently sitting at 25bps.
Persistence in the Industry
But commercial lending remains highly competitive this July. Most lenders continue to fight tooth and nail for every piece of business available. Fannie Mae and Freddie Mac continue to quote aggressively out in the market for quality transactions. On the Freddie Mac SBL end, Freddie reduced rates by as much as 38bps in standard markets for certain structures. The gut feeling out there is that Fannie Mae has slowly taken back a decent chunk of market share from Freddie on the SBL side and Freddie has had enough, coming back in swinging at full force.
On the market side, it was a mixed bag this week in Agency CMBS land. Fannie Mae DUS and Freddie Mac K’s / FRESB’s enjoyed a week of some minor spread tightening as investors returned with cleaner balance sheets following the end of the first half of the year. New Issue AAA CMBS spreads were being marketed tighter this week on the heels of the latest Goldman Sachs deal to price in the market. Thus, market spreads on fixed-rate DUS bonds followed suit, trading 2-3bps tighter this week with Freddie secondary bonds clearing the same.
The mixed bag, however, comes in the form of Agency floaters and GNMA project loans. Earlier this week Freddie Mac priced its most recent floating rate securitization, FHMS KF48 with the A1 bond pricing in at LIBOR+29bps, wider than initial price talk and sharply wider than the most previous transaction to price in the market a few weeks earlier. On the heels of that, DUS SARM pools were being bid wider in the market by roughly 5bps from the start of the week. Most of the widening in the Agency floating rate space is attributed to cyclical demand with the traditional investor base for that product. The real pain, however, continues to lie within the GNMA market, where spreads on new issue business continue to soften. Spreads on GNMA project and construction loans widened roughly 5-10bps this week alone as investor demand on GNMA REMIC structures has seemingly dried up. This is typical for the GNMA market and is cyclical in nature – it’s likely that the market will reverse course at some point in the coming weeks.
The views and opinions expressed in this article are those of the author, and do not reflect the views of Hunt Real Estate Capital, LLC or its affiliates. Hunt Real Estate Capital does not provide any guarantee or opinion regarding the readability, usefulness, completeness, accuracy, or currency of the information provided herein.