If you are like me and are an avid observer of your 401k, you are in the midst of a pure love fest with this market and, more importantly, your new best friends are Trump and Xi. The foremost and really only driver for markets this week was of course Trade, and given the three-year history, and as Forest likes to always say, “you never know what you’re going to get.”
Unlike Forest though, who somehow got to meet every celebrity and President out there, us common folk are watching and waiting with much anticipation as the two leaders forge ahead having finally decided to sit down and play “Let’s Make a Deal,” a la Monte Hall, while at the same time lending a helping hand to the Equity Markets as the major indices continue to smash any previous all-time high records. With the first phase of a Trade Deal in close proximity and the agreement from both sides that tariffs imposed on each other’s goods will soon begin to be rolled back (in phases), there is a ton of excitement in the air, which for me is very reminiscent of the enthusiasm Al Bundy displays when reminding all of his feat of four touchdowns in one game for Polk High.
Given the way the Equity markets are behaving, we see no reason for the momentum to stop (at least for the time being). We have always (since November 2016) been a firm believer in the notion that, as Trade goes, so will go the markets (prior to that my mantra was “as oil goes so will go the markets,” either way…). If reaction to the agreement on this first phase of a trade deal has garnered such cheer from market participants (doors are wide open for you 3,100 S&P!), with hopefully enough cheer to hold onto as we begin the most wonderful time of the year, we can only imagine the market’s reaction to subsequent phases thereafter, and which may apparently be a good indicator for those sitting in the MAGA section as they watch the Democratic Primaries in utter passion, which are getting ready to be in full swing (with Mayor Mike, or no?)
There are still some details to figure out, number one of which, where exactly the two leaders will sign said agreement. Interestingly, nowhere here in the U.S. is good enough. Most importantly though is what exactly this first phase accomplished and what did the two fearless leaders agree to since for the time being most of the specifics seem to be pretty hush hush, and all parties appear to be following the Jimmy Conway mantra, “Never Rat on your friends and always keep your mouth shut.”
The President always likes to say he’s a deal maker, which is an art form/talent at the end of the day, and while the devil is in the details, without knowing the exact minutiae of the agreement it would make sense for some to be apprehensive/pessimistic and feel the markets may be overbought here, much like Miracle Max wondering if his miracle pill coated in chocolate will be effective in reviving Wesley from being “mostly dead.”
Be it as it may, the mere fact the two sides have agreed to roll back some tariffs should help spur global growth, particularly in the U.S. and China, and calm those ever popular contagion fears originating overseas. On the flip side of all this, with markets being in full risk mode, a global selloff in yields has taken shape as the march to 2% on the 10-year Treasury is now truly in focus with 10-year German Bund yields retreating from deep negative territory to what we would now term as “moderately” negative territory. At the same time, the shift in the markets has given greater credibility to the Fed’s recent signal of a monetary policy pause, which has already been persuaded by the economic numbers released domestically and which continue to show signs of growth and an improving jobs market, all this in the face of the extreme opposite being reported by our overseas neighbors.
This morning Stock Futures are pointing to a slight dip at the open with the rally assuming a temporary breather and perhaps some profit taking starting to take shape. Nonetheless, 10-year Treasury yields continue to trade higher after yesterday’s monster selloff with yields finding some footing in the mid 1.90’s. Simultaneously, the 2-year UST is yielding 1.69% as the yield curve continues its steepening trend in the face of our current historic rally.
With not much on the docket today from an economic standpoint and heading into the long holiday weekend, we expect participants will attempt to take a respite today and look ahead to see what the next week brings. As Dr. Hannibal Lecter says, “All good things to those who wait.”
Unless you work for a local bank, these higher Treasury and Swap yields have placed a slight damper on activity within the commercial real estate finance market. We are at that point in the cycle where a number of loan assignments initially sized and placed under application a few months back when the 10-year Treasury was yielding 1.50% are now seeing substantial loan proceeds cut as lenders try vigorously to deliver terms agreed upon while maintaining minimum required debt service coverage ratios. As you can imagine, this double whammy has the capacity to tick off any client something fierce and only reminds me of the frustration and anger displayed by George Banks when he tries explaining to the supermarket employee his rationale for removing the superfluous hot dog buns from the packaging. One remedy includes the repricing of loan spreads to ease some of the pain, and in general we have seen spreads compress over the last few weeks, especially now that Fannie Mae and Freddie Mac have decided they are back in business quoting select assignments at aggressive credit fee levels competitive with the overall markets. Couple that with continued compression in overall Fixed Income Spreads, and lenders have been able to quote gross loan spread ranges for full leverage transactions anywhere from 160-220bps+ out in the market. A pretty wide range for sure, however as is becoming the common theme in our market, overall deal specifics can sway the needle in any direction. For the most part though, lender pipelines appear to be gaining steam once again and the CRE market as a whole may be in store for a massive final two months of 2019.
CMBS volume has surged over the last month or so, and the final two months continue to look promising for overall issuance. The uptick is mostly being attributed to the pickup in multifamily assets, which lingered following the late summer Agency pullback. This week two multi borrower deals priced out in the market and in line with pricing expectations. BMARK 2019-B14 backed by JP, CITI, and DB saw its AAA super senior bond clear at swaps +93bps, while the super senior class on BBCMS 2019-C5 went out at swaps plus 95bps. The difference in spread between the two offerings is being attributed to the lack of a big name, aside for Barclays, on the BBCMS deal, although given historical metrics, we would have expected the BBCMS deal to clear even wider. The tighter print was likely pushed through given the overall market improvement on credit spreads. Expected to price later today are the latest offerings from Morgan Stanley and Wells Fargo with initial guidance more in line with the BBCMS transaction at swaps plus the mid 90’s.
Agency CMBS – FNMA DUS
DUS volume for the most part has been slow, which is odd for this time of year. However, this remains the result of the late summer pullback on pricing and credit which is now making its way through the system. Given the lack of volume and higher yields, DUS TBA investor spreads have improved ever so slightly with new issue 10/9.5 pools trading hands around +65bps to swaps and 12/11.5 pools trading in the low to mid 70’s area. As has been the case for quite some time, smaller pools continue to trade anywhere from 5-10bps back of those levels. With AAA CMBS showing signs of tightening and New Issue Freddie K’s following suit the Freddie K to DUS basis is trading at the widest levels we have witnessed in quite some time, nearly 10-12bps. Part of the reason may be single asset fears on the minds of investors triggered by the eminent domain matter which surfaced in Kings County, WA a few months ago, and the prospect that this is a real concern which seemingly can surface anywhere, anytime, and that further protections are needed within the collateral loan docs to protect investors in the event of an involuntary prepayment. That said we do think cooler heads will eventually prevail on this issue and the lag in DUS spreads tightening will eventually catch up to the rest of its market peers over the next few weeks, unfortunately though just in time for the traditional end of year widening.
It was a busy week on the New Issue front in Freddie land where three new issue deals priced in the market including the latest 10-year Fixed securitization, K100, which saw it’s A2 bond clear at swaps +56bps. Given the tight print, recent new issue secondary bonds tightened on the follow. Also this week Freddie priced its latest Seniors Housing floater transaction K-S13, whose senior bond (no pun there) priced in at L+66bps, and cleared 10bps wider than the K-F71 Conventional Floating Rate transaction which priced only a day earlier. The 10bps premium on the Seniors deal does seem rich and is more than the typical margin we see for Seniors out in the market. Nonetheless, on the heels of this and the KF71 deal, DUS SARM spreads have widened a bit out in the market. With no new issue deals out this week on the FRESB side we all had time to review and accept the invitation to the NYC office holiday party.
Volume continues to be light on the GNMA front and higher Treasury yields have been no help in getting borrowers to pull the trigger on deals in process despite tighter spreads being offered out in the market. The fancy of choice for most investors continues to be the $103-$106 portion of the price curve with spreads over swaps on PL’s clearing in the high 70’s to low 80’s range. Lower coupon deals closer to par are continuing to trade wider for the most part, though we have seen some willingness to price those coupons more aggressively as a way to get more business injected into the REMIC machine. Currently CL’s are clearing roughly 50-60bps back of PL’s. For the time being we are constructive on GNMA spreads particularly in the face of a steeper yield curve and higher long term rates with more attractive coupon levels, easing the liability costs for folks taking long positions in the market.
That’s all from us for now. Be mindful of liquidity today past 12 p.m. EST as we head into the long holiday weekend.