The partial government shutdown has reached day 21 and is now tied for 1st as being the longest shutdown in US history, previously held in 1995-1996. The difference being this go around is that there is no end in sight and the more we hear of meetings and negotiations taking place between the two sides, the nastier the rhetoric, child play, and one-sided reporting gets.
Yet at the same time some of the reporting has become a source of entertainment. Like Kelly Ann Conway calling Jim Acosta a non-PG version of “smart aleck” looking for a viral clip. And Chuck Schumer and Nancy Pelosi looking like disappointed parents on a Saturday Night Live skit during their rebuttal to the President’s speech earlier this week. What is not comical, however, are nearly 800,000 government employees who will not be the recipients of a hard-earned paycheck until the two sides get their act together – who knows when that may be.
Amazingly though, the markets have cautiously brushed aside the current political upheaval, and are in the midst of crawling back to life following the turbulence and volatility that dominated the final 2-3 months of the year, when we saw the major Equity Index’s give back nearly 20% from their highs, Treasury yields rallying back to the 2.60% mark on the 10-year while Fixed Income spreads globally throw up in every way possible, and the price per barrel of oil falling to $42.50. Yep, the positive tone in the markets to start the year has been rampant, feeding off of renewed optimism on trade talks with China and the FED, whose fearless leader Jerome Powell signaled that a pause in the rate hike cycle might be warranted given the slow pace of inflation and slight concerns regarding economic growth.
Being ignored and thrown to the wayside are the government shutdown, continued concerns regarding slowing global economic growth, and Brexit once again attempting to take center stage. Nope, at this point the markets are ignoring all that and are attempting a cautious comeback, which will hopefully be more successful than McCauley Culkin’s comeback 25 years after Home Alone. The key here is caution, and while Equities have rallied back nearly 10% since Christmas, the pain and bruises from the late 2018 market meltdown are still fresh in every investor’s mind and any sudden shift in either of the recent market catalysts above can swing market sentiment quicker than Forest Gump running from the bus stop to see his beloved Jenny.
This morning Equity Futures are pointing lower, perhaps a sign of some minor profit taking, also following the CPI report coming in spot on with expectations and following five straight days of gains while Treasury Yields have rallied 2-3bps across the curve with the 10-year UST trading in at 2.70%, down 4bps from yesterdays close.
With recent rhetoric from the Fed signaling a potential pause in rate hikes, the flattening trend of the yield curve has taken a breather as well. The delta between the 2- and 10-year treasuries sits currently at 16-17bps – the steepest we have seen in weeks.
The rally back to life in the Oil market has also taken a slight breather this AM with oil trading lower and now at $52.25/barrel. In case you haven’t picked up on it yet, I am a firm believer that while political and economic events will always drive markets in a subjective manner, Oil will always be a window to investor sentiment and my opinion as taught by my dad is, “Ultimately, as Oil goes so go the markets.”
The Commercial Real Estate side, particularly the securitized market, has kept in stride with the positive tone of the overall markets, as the New Year, investor sentiment, and continued tightening/improvement in corporate spreads – particularly CDX IG – have grinded secondary mortgage spreads tighter at a fairly quick pace to start the year. Of course, the lack of volume hitting the market at this time of year (typical and cyclical), with demand by far outweighing supply, also helps to move the needle in the right direction. What happens when all these deals get signed up at today’s tighter spreads and then hit the markets at once is another story and is a column for a separate day.
Today is all about being positive Dave and crossing other bridges when we get there. This past year, despite prevailing market volatility, was another strong one for the Agency CMBS side. And while numbers have yet to be announced, the anticipation is that both Fannie Mae and Freddie Mac came in close to the numbers booked for 2017, if not exceeded. To start 2019 Agency CMBS spreads on the DUS and Freddie K side have tightened dramatically, while New Issue FRESB are not hearing it and are trading wider from previous Issues.
On the DUS front investor spreads over swaps have tightened nearly 10-15bps across the curve from the wide’s seen at the end of 2018. Vanilla 10/9.5 spreads are now clearing in the low 70’s for 45-day forward settle paper. Secondary spreads on the Freddie K side have been on the same footing as their DUS counterparts with recent new issues trading hands in the secondary in the low 60’s over swaps down nearly 10bps from a mere two weeks ago. With the CMBS market seeing noticeable improvement as well, recent New Issue AAA’s trading Swaps +100bps range, typically we would align a majority of the improvement on the Agency side to its “big sister,” however, in this case, the simple lack of supply and positive tone to start the year is the foremost catalyst to the strong punch out of the gate in spreads.
The Debbie downer in all this action has been the FRESB market where the 1st transaction of the year priced yesterday (FRESB–SB58) and saw spreads on each of the tranches price wider than where the SB57 deal priced four weeks ago. Despite this, Freddie Mac did lower Coupon rates this week on new loan business hoping to drum up the pipeline to start the year. Perplexing perhaps – but not as perplexing as the kid on the Long Island Railroad yesterday who felt his school bag having a comfortable seat over my bottom was of utmost importance.
Speaking of Debbie downers, we may as well rename the GNMA market to that effect. While the government shutdown certainly has compromised what may or may not be able to get done in the FHA sector, the lack of supply and positive tone in Corporate and Mortgage spreads has not spilled over to the GNMA side as of yet where spreads on GNMA PL and CL’s remain at 12-month wides. The flat yield curve and lower Treasury yields, as usual are certainly having an impact, and we once again see little to no interest in low yielding par coupon bonds. At current yield levels, the flavor of choice are 103-105 coupon bonds with spreads over swaps trading wider as you hit the lower coupon stage.
That’s all from us now. Have a terrific weekend!