In a week pretty much dominated by the Fed – more so than any Fed member would have liked or expected when they arose Monday morning – you really have to hand it to Powel and company for maintaining composure in the face of tremendous pressures coming from all spectrums (including the head honcho in DC).
While 95% of market participants were more focused on this week’s FOMC meeting, a small fraction of the human race huddled in offices throughout the country were quietly facing and dealing with a potential calamity in the overnight funding and Repo markets which received less attention from the media and press than Jennifer Lopez’s reported regrets over starring in the new ‘Hustlers’ movie. In short, overnight lending and repo rates spiked earlier this week, nearly 700-800 basis points in some cases, with rates hitting as high as 10%, leading to angst and fear that a potentially much larger liquidity problem is on the horizon and causing the Fed to step in, now four straight days running, by opening the Repo window to the dealer and banking community and injecting some much needed cash into the overnight financial system for the first time in nearly 10 years. While the reasons for the overnight funding pressures still remain unclear, like Josh Baskin I have to say, “I don’t get it…”
Everything from Treasury coupon Settlements to quarter-end Corporate Tax payments are being blamed for the imbalance of cash available in the banking system, and what is clear is the rather quiet potential contagion dangers to other markets, including ours, if a permanent fix is not set in place at some point in the near future.
For now, the Fed continues with the daily band-aide of injecting $75B here and $75B there, you know, chump change. Of course, to help curtail the situation further, the Fed did decrease the IOER (that’s Interest on Excess Reserves for those who are not in the know) from 2.10% down to 1.80% this past Wednesday as part of their overall monetary policy change, an appropriate move given the overnight funding burdens mounting. However, the move on the IOER was largely overshadowed by the Fed, as expected officially reducing the target range on the overnight Fed Funds rate by 25bps to an upper bound of 2%. Much to the dismay of some, including our dear President, 25bps was all the Fed was willing to part with at this time. I have to admit that the economic conundrum that is the US economy does place the Fed in a difficult position.
Overseas, we continue to watch as growth and manufacturing sputters, and fears of a global recession continue to mount. In addition, the never ending Trade War saga between the US and China continues to have a profound effect on global markets, and remains the likely the number one indicator as to where the global economy heads from here. Of course, over the last few weeks, both sides of the negotiating table have decided that maybe it’s time play nice in the sandbox. As we all know, that can change in an instant via one well thought out tweet or anything to that effect.
Meanwhile, here on the main land, aside for the liquidity pressures featured this week, which we kid you not, if not resolved soon can turn into a disaster, we are simply not seeing the economic pressures our overseas friends are experiencing. Retail sales, manufacturing, growth, and unemployment continue to show signs of a fairly strong to robust economy with no real recession in the rearview mirror, despite the current shape of the yield curve. So unlike Montgomery Brewster, Americans continue to spend and accumulate assets keeping the world’s greatest economy afloat.
After trading some 45 basis points higher the last two weeks, it seems the Treasury curve may have found some firm footing albeit for the time being. A mere two and a half weeks ago we were all chatting about a 1.45% 10 year UST and the march to 1%, with zero and perhaps negative 10 year rates not too far behind, similar to the situation many of our overseas counterparts are experiencing and something a few folks in DC would like to see as well to help spur economic growth even further (this in of itself, is beyond arguable). The drastic turn higher in yields after what seemed to be a never ending rally in the Treasury markets is mostly being attributed to renewed optimism on the Trade War front, but for the most part is likely pegged to a simple correction in yields, at least for the time being. This morning 10 year Treasury yields are trading in at 1.77% and in line with the 1.75% – 1.80% range the market has fallen in for a great majority of the week.
Now that the new GSE scorecard for the next five quarters has been released we can once again discuss Agency financing in the same breath as CMBS, Banks, and the Life companies. One would think so right? It’s been over a week since the release of the new scorecard which provided a hard $100B cap over 5 quarters for each GSE including a $37.5B limit that must be reached on what has been defined as mission rich business, which mostly includes affordable housing, manufactured housing, and loans made in some more underserved markets with a great majority of the units being rented to those at various percentages of Area Median Income levels. However, the response from the GSE’s has been muted and mixed.
Basically they are thrilled with the new scorecard which only shows the FHFA’s commitment to the growth and support of the multifamily market by providing the Agencies a run rate of $20B per quarter to play with. While the Green execution and the other previous cap exclusions are for all intended purposes is pretty much gone or reinterpreted under the new guidelines, for the most part the GSE’s should have what to run with to get the machine going after two months of confusion, anger, and disarray over the unknown, much like the look of confusion seen on Miranda’s face when Mrs. Doubtfire’s identity was revealed in the restaurant.
Nonetheless, the response from the GSE’s has been rather tame to say the least with not much relief on Servicing and Guarantee fee pricing or credit terms being relayed yet. At this point, CMBS and other financing executions continue to scoop up business after seeing the largest one-month uptick in multifamily requests since prior to the great recession.
On the Agency CMBS front, the uptick in Treasury yields over the last few weeks in investor spreads over swaps have firmed up across the curve with 10/9.5 DUS TBA’s trading in the low to mid 60’s range over swaps, with 12/11.5 and 15/14.5 trading 10 and 15bps respectively, while small balance pools are trading nearly 8-10bps wider than all starting points. New issue volume on the DUS side continues to be strong with nearly $750MM to $1.5B+ coming out weekly for bid from originators as borrowers continue to take advantage of the low interest rate environment for their refinance and acquisition needs. On the Freddie Mac end, secondary spreads in Freddie K’s and FRESB’s were tighter this week with recent new issue 10 year Freddie K bonds trading hand in the high 50’s over swaps. For the new issue front, Freddie priced there latest Seniors Housing Junior lien securitizations this week all totaling nearly $1.5B. With clarity on the FHFA scorecard, the hope and expectation is that the GSE’s will eventually get it together and stop playing house so that the Agency lending community can gear up for what was hoped to be a monster 4th quarter.
There is not much new to report on the GNMA front. Spreads have been stable since the retrace of 10 year yields back to current levels with $104-$106 premium bonds trading in the low 80’s over swaps, wider premium and just the opposite closer to par bonds trade at wider spread levels. With AAA CMBS trading low to mid 90’s for the time being, we don’t expect much in the way of further movement in Agency CMBS spreads over the next few weeks, of course barring any further market moves or calamities.