After weeks of optimism in the market – mostly led by confidence surrounding a potential trade deal with China – the main antagonist lurking in the background (slowing/weakening global growth) has finally leapfrogged over its adversaries to become the focal point for the market and investors.
While the slowdown in global growth and prospects for a recession are both nothing new, after the sharp market sell-off of late 2018 when many believed the markets were oversold, any distraction from extreme market volatility was a welcome sight. If optimism on a Trade deal being struck with China was that movie, then so be it – and please allow global growth concerns to play second fiddle, much like Chilly Willy always coming in second versus Woody Woodpecker.
Yet despite the lack of effect on markets, the last few weeks have been an ever-evolving political landscape and rhetoric, both from a geopolitical standpoint and domestically, to which we have become so accustomed to over the last number of years. The fallout from the North Korea nuclear talks in Vietnam did little to persuade markets as did Michael Cohen’s testimony against the President at which times Cohen looked so alone he seemed like Spaceball’s Barf – a “mog” – half man, half dog being his own best friend.
Nevertheless, slowing global growth is now the theme of the markets and Equities have suffered losses in the last nine out of 10 trading sessions with Futures pointing to a lower open this morning following overnight volatility in China and this morning’s weak release on domestic unemployment which saw the economy add a mere 20,000 jobs over the month of February. While wages saw an increase, this job print in general is not benign and is being translated as very disappointing. The release provides further fuel that slower growth lies ahead, and no matter how much we want to run away, it will be hissing at our heels for the near term much like Willie Scott driving Dr. Jones crazy as they embarked on their journey to Pankot Palace.
As noted above, overnight markets were sharply weaker continuing with the theme of the last few weeks. This morning Stock Futures are pointing to a sharply lower open with the weak jobs report stirring the pot further in an unwelcome showing with no rose petals to throw as its feet. Treasury yields have continued their flight to quality with the 10-year Treasury now trading in the 2.63% range, down roughly 13bps on the week and fighting ever so hard to break through the 2.60% barrier which has become the breaking point in the market for further evaluation and where yields may be headed from there.
Through all of this latest volatility, the Yield curve has maintained its flat shape with the 2- to 10-year delta averaging around 16-17bps for the last few weeks.
Volume on the Commercial Real Estate side has been a hot topic of discussion over the last number of weeks. It’s been no secret that the first two months of the year were abnormally quiet out there, with most attributing the pause in volume to conference season, which by the way happens every year so my genius brain tells me that theory holds no water and is more akin to Jack Tripper trying to convince the Ropers nothing out of the ordinary is happening in the apartment.
This, in turn, has caused originators on all ends, both on the securitization and balance sheet side, to once again begin quoting terms well inside of any reasonable profitability or credit metrics just to drum up more business through the door. While we are hearing (and seeing internally) that Agency CMBS lender securitization pipelines are full, the lag of movement in deals working their way through the system has been concerning. The dearth of volume continues to have an impact on New Issue spreads with DUS, Freddie K’s, FRESB’s, and GNMA’s all either tightening or maintaining status quo through the impact of the latest market volatility.
However, with global growth concerns gaining steam, this morning’s jobs report, CDX spreads showing wider prints this morning, and CMBS BWIC’s being offered at wider levels from the day before, we may see Agency CMBS spreads going the other way from here despite the lack of supply. Vanilla 10-year FNMA DUS spreads have been averaging low- to mid-60s over swaps while New Issue Freddie K’s are trading hands in the high-50s range. Tiering on loan balance and size continues to be a concern with transactions below $3 million and higher premium levels trading at wider prints in the market, in some cases as much as 7-10bps.
It’s the same story over on the FHA front. Volume has been the name of the game and the lack thereof to hit the markets has spreads in a conundrum particularly on the Construction Loan side where activity has been close to dormant. Spreads on the GNMA Project loan side have been trading in the 80-85bps range over swaps depending on size and premium level with CL’s being indicated close to 60bps wider depending on draw size and construction term.
Not much else new to report on our end. We are watching things very closely out there and will report back as market dynamics evolve. Have a terrific weekend and reach out if you need us.