Friendly reminder that US Markets are all closed today to honor President H.W. Bush. No Rate Lock or trading activity can occur today.

Now for the elephant in the room, the markets. How to explain yesterday’s move in which we saw the DOW fall 799 points and the 10-year Treasury hit 2.91%, while also experiencing curve inversion at the short end of the curve as the 2-year yield is now yielding higher than the 5-year.

In brief, Trade tensions once again resurfaced. All of the optimism which was seemingly gleaned from the G-20 dinner meeting between President Trump and Chinese President Xi was squeezed out of the markets yesterday as the President and some members of his economic team walked back the talk that significant progress – or even a deal – had been made, and that the US was ready willing and able to slap more tariffs as needed. This spooked the market something fierce as the selloff in Equities persevered throughout the day, and the markets were in pure risk-off mode with Treasuries at the long end of the curve rallying and Corporate spreads widening. The 10-year UST finished the day at 2.91% a mere 11bps higher than the 2-year with the 2- to 10-year basis now at its flattest level since the curve inverted back in 2007.

As noted above we are in a state of curve inversion at the short end of the curve with 2-year yields now surpassing 5-year yields by a basis point. Historically, an inverted curve signals an economic slowdown is on the horizon – as well as the potential for a recession a year or two down the road. The curve has been flattening in dramatic fashion over the last year, with short-term yields increasing in line with Fed expectations while the long-term end of the curve, albeit pointing higher, lagged in comparison, as remnants of the Fed’s now ended QE policy continued to have an effect on the long-term side and continued investment abroad in long-term US securities – thus narrowing the gap between the 2- and 10-year yields. Now with the Fed in question and the markets in disarray, money is once again flowing into the long-term end as the short-term side remains stagnant, helping to further bridge the gap.

In the Commercial Real Estate Finance world, it was extremely volatile yesterday, consistent with the overall feel in the markets as Agency CMBS spreads seemed to get softer throughout the day, adding to an already turbulent atmosphere given the plethora of supply hitting at once (and yes, unlike Jefe I do know what a “plethora” is – Three Amigos reference for those scratching their heads or under the age of 30). Thus it has become very much a choose your spot market out there with investors picking strategically when and where to bid. As is typically the case, with the rally in Treasury yields, GNMA spreads have suffered the most with spreads this week out nearly 10-15bps on Project and Construction loans, while coupon floors are once again the goal of yield-seeking buyers.

With the markets closed today, time will tell what tomorrow and Friday will bring. Either way, we expect the volatility in the markets will continue in some way, shape, or form through year-end.