It was a pretty lackluster week overall in the markets. Aside for the Fed minutes released on Wednesday – whose details can go either way depending on how you interpret it – and the release of the Consumer and Producer Price Index reports for the month of March, there was little on the docket from an economic standpoint, ensuring that the picture of the Black Hole would be the most exciting part of the week. Couple that with a quiet week in Washington, DC, and there really is not much to talk or joke about.
Nonetheless, the sentiment this week was rather cautious overall. Equity Markets failed to capitalize on the recent Bull Run rally from the last few weeks which saw the major Index’s grind back to all-time highs despite persistent chatter regarding slowing global growth and the recent inversion of the yield curve, which has since quickly “normalized.”
Of course, optimism on trade talks with China has largely overshadowed the above since the start of the year. But until a deal is officially in place with signatures on the dotted lines, all the positive chatter reminds me of the repetitive shrimp delicacies Bubba tells Forest about.
The Fed minutes this week may have been confusing to some – but then again what else would you expect? We know we are never going to get a direct answer as to the Fed’s intentions. However, when you read a report that states economic growth and consumer spending will likely be tepid for the remainder of the year with inflation largely in check, one would maybe expect a firm, “barring a catastrophic change in economic conditions we are done with any changes to monetary policy for the remainder of the year.”
While that is likely the notion here, until the market hears or reads something to that effect, we will continue to be in that ping pong mode going back and forth between “hike” or “cut” at least through the near term. At this point, Fed Chief Powell is definitely in the hot seat, being pulled by his own “I am not so sure yet” and the difference in overall Fed views on monetary policy compared to those of his boss and Commander in Chief who has been vocal regarding immediate rate cuts and a reimplementation of the Fed’s quantitative easing policy to help spur the market even further.
The disappointment the President has shown in the Fed chief has not been muted and likely has Powell’s head spinning in all directions. With reports this week out of the CPI and PPI continuing to suggest inflation remains in check, the Fed Chief is being pulled between his own assessments of economic conditions versus the rest of the world and may need to “PIVOT” just like Ross would, and consider a change of heart much like the Russians suddenly cheering Rocky on versus Drago.
This morning stocks are off to the races as Treasury yields are selling off on the heels of strong credit data coming out of China as well as first quarter earnings season getting underway in a positive light with JP Morgan and Wells Fargo both beating analysts’ forecasts for Q1. Treasury yields are up 3-6bps across the curve with the 10-year Treasury trading in at 2.54%, the highest level we have seen in weeks.
As long term Treasury yields have increased, the shorter end has failed to keep pace and the inversion we witnessed a few weeks ago between the 3-month and 10-year yields has since reversed course as the 10-year is trading higher by an 11bps cushion as of this writing.
Markets in Commercial Real Estate finance continue to impress both on the portfolio balance sheet and securitization lending side. Pricing and credit terms being quoted remain extremely aggressive as Commercial Real Estate lenders continue to fight hard to win all variations of loan assignments. In the CMBS and Agency CMBS world, credit spreads continued to impress with investor interest remaining in high demand. While new issue in CMBS is currently quiet, spreads on AAA’s for recent deals priced are trading hands in the low to mid-80s over swaps. This past week Freddie Mac priced two transactions in the market. The first of which was a seven-year Fixed Rate securitization, FHMA-K734, which saw its A2 bonds clear at swaps +48bps. The other was Freddie’s most recent Small Balance transaction, SB61, which for the most part priced in line with expectations.
New Issue FNMA DUS volume this week was heavy with nearly $750MM coming out to bid from Originators looking to start the second quarter with a bang. Spreads on vanilla DUS structures remain firm with the traditional 10/9.5 TBA trading hands in the low 60s over swaps. We continue to see tiering in demand based on loan size and premium with dollar amounts below $3MM coming with higher premiums trading at sharply wider spreads than the generic market. With 10-year Freddie K A2 bonds trading hands in the high 50s to swaps, at this point we think there is further room for DUS and Freddie K spreads to tighten from here given the tight delta to AAA CMBS.
All in all from a gross spread standpoint to borrowers both FNMA and Freddie Mac, continue to lean in heavy on pricing for the right transactions recognizing the fierce competition in the market, and as always continue to seek Green and Affordable rich deals to help maintain charter mandates.
On the GNMA front, for the first time in a while, we are seeing tremendous improvement in spreads as the lack of volume still persistent from the government shutdown a few months ago has finally awakened the REMIC machine. Project loan spreads are trading roughly 5-10bps tighter week-over-week with deals trading hand in the mid to high 70s over swaps at the belly of the premium curve. Construction loan spreads remain 65-75bps wider, with further widening for small first draws and longer conversion periods.
That’s all from us for now. Have a terrific weekend and reach out if you need us.