If Fed Chief Jerome Powell has anyone to thank for having his and the FOMC’s back regarding their current position on monetary policy, they should look no further than the Treasury Market where yields this week are once again testing the waters and trying to inch their way back to monthly highs and enter unwelcome territory.
It is evident the Fed Chief and the current FOMC really need a friend given they have no peer in the President who has repeatedly called for immediate rate cuts and a restart of the Fed’s previous Quantitative Easing program to help spur an already, as the President likes to put it, “fantastic” economy even further. One can certainly understand the Presidents stance. After all, things are doing great.
Stocks have been flirting here and there with all-time highs, and people are making money. So why slow things down? Sounds reasonable if you ask most folks. Unfortunately, that’s not the way historic economies typically work. While the Fed Chief may be taking a somewhat conservative stance given the pullback in global economic growth and manufacturing, a jump to a 50bps rate cut may not be the wisest decision just yet. So while the markets continue to follow the ever-evolving rate decision saga, the typical market catalysts such as Trade, Economic Growth, Earnings, and the Meghan Markle baby watch continue to guide the markets each day bringing a fresh new wave of sentiment, either up or down, to market investors.
Today the markets are all about Jobs with this morning’s release of the Unemployment report for April. While the report topped forecast estimates with more jobs added than expected, wage gains continued to disappoint much like Fredo letting Michael down by joining forces with Johnny Ola.
This morning Stocks opened higher with Treasury yields initially trading higher immediately following the jobs release, but since trading back down. At the time of this writing, the 10-year UST was trading in at 2.52% and down from a high of 2.57% immediately following the April jobs release.
With mixed emotions and expectations regarding the Fed policy on rates, the yield curve has maintained firm footing recently with the 2-10 year basis currently sitting in at 20bps.
On the Commercial Real Estate Finance side, the competition for loan assignments remains as fierce as ever both on the securitization and balance sheet lending fronts. At this point there seem to be no limits as to what lenders will quote to sign a deal under application, with some credit and pricing terms approaching mere insanity. Nonetheless, volume remains hot with Banks, Insurance Companies, CMBS, and Agency Lenders fighting tooth and nail for every piece of decent business to be had.
Volume on the Agency CMBS side was strong once again this week with a majority concentrated in the DUS space as lenders continue to hit the market with deals left and right. For the most part, DUS spreads across the curve – from 5-year balloons all the way out to 30-year fully amortizing terms – continue to hold firm and impress, specifically for traditional call protection structures and pools exceeding $5MM. As noted a number of times already this year, the tiering out in the market on loan amount is amongst the widest we have seen in many years. With average 10/9.5 DUS TBA spreads over swaps trading in the swaps plus 60bps range, there is a sharp contrast for pools below $3M specifically those trading at higher premium levels where spreads may range 7-10bps wider, causing much heartburn for folks like myself just looking to make an honest day’s pay.
On the Freddie Mac side, new issue activity was quiet this past week, and secondary spreads on recent new issue Freddie K’s and FRESB transactions continue to perform well out in the market with the Freddie A2 basis to DUS 10/9.5 around 4-7bps, which is consistent with historical market measures. With new issue AAA CMBS clearing low to mid 80s over swaps, we think Agency CMBS spreads are appropriately priced at current levels. Investor interest on the GNMA front continued to firm up this week after months of being dormant. Spreads on traditional GNMA Project Loans are roughly 3-5bps tighter on the week with constructions loans trading roughly 60-65bps wider, and even past that for transactions with longer conversion periods and tiny 1st draw amounts.
We would call GNMA PL spreads at the belly of the price curve right around 70bps to swaps with lower par deals trading a few bps wider.
That’s all from us for now. Have a profitable day and a terrific weekend.