The wild start to 2020 can best be compared to riding Walt Disney World’s famed Space Mountain adventure — a high-speed roller coaster in the dark, where we simply don’t know where we are heading. On the one hand, there is the optimistic side of the aisle cheering the market, praising what has become new, daily, all-time record levels on the major Equity Indices in the face of a prolonged sub 2% 10-year Treasury and negative yields abroad, sticking with a positive tone for the weeks and months ahead despite geopolitical tensions mounting (or choosing to ignore those concerns). At the opposite end of the spectrum, where all those pessimists sit in dire need of binging some classic Growing Pains episodes to assist in “show me that smile again,” concerns persist regarding the health of the global economy, trade deal specifics, as well as the outcome of future phase negotiations, manufacturing issues at home and abroad, and of course, geopolitical concerns.
Nonetheless, rising tensions in the Middle East between the U.S. and Iran has led to a somewhat rocky start to 2020, sending a level of uncertainty and confusion to the markets not seen since folks tried understanding what exactly “Schlemiel! Schlimazel! Hasenpfeffer Incorporated” actually means. While overall things have been calmer following Iran’s mid-week “revenge” attack on U.S. military bases in the region, and perhaps cooler heads will continue to prevail, one does get the sense that given the extent of the conflict, any further flare-up will potentially have a grave impact on overall markets, thus leaving market participants on edge for the time being despite record stock prices. The bottom line is we are within swinging distance of 29,000 on the DOW and 3,300 on the S&P. If that alone doesn’t tickle anyone’s fancy, I am not sure what will. If I told you one year ago today such would be the current market trading levels at this time next year, I am pretty sure most, if not all, would have signed up for that quicker than traveling “ludicrous speed” aboard Spaceball 1.
Nevertheless, you get the sense that many market participants are ready willing and able to flip the sell switch, and the fate of which lies in the hands of our fearless leader in D.C. and his great buddy the Ayatollah. Despite it all, for now at least, the markets are behaving in an auto-pilot, upward motion still feeding off the historic Phase I trade deal with China set to be signed, sealed, and delivered next week. In the background of all this is the clown show, I mean impeachment saga, taking place in D.C., which has had as much of an impact on the markets and our daily lives than this week’s major announcement out of the UK that “Mexit” is in full swing with Prince Harry and Princess Megan announcing they will be vacating their esteemed posts within the royal family and potentially setting up shop back here in North America, for at least part of the year.
This morning’s Unemployment report for the month of December proved somewhat disappointing with the market adding fewer jobs than expected and November revisions coming in lower than initially reported, a surprising outcome given the holiday season. The most concerning printout of the report, however, is the stated growth in wages rising at their weakest level in nearly two years. Despite the results, current Fed Funds’ futures are showing that the odds of a rate cut in 2020 remain unchanged with a 37% chance of a cut still being priced in by the end of the year.
This morning Treasury yields are trading slightly lower following the Unemployment release with the 10-year UST trading at 1.85% down 1bp from yesterdays close. At the short end of the curve, the 2-year is yielding 1.58%, a now 27bps delta and a reversal of the curve steepening trend we had seen over the course of most of this week.
With a heavy Corporate Bond issuance calendar for this week, swap spreads were in a scaled tightening mode for the majority of the week with a slight reversal this morning following the unemployment release. Generic 10-year swap spreads had tightened to -6.5bps earlier in the week but are now trading at -5.5bps. Still a far cry from where spreads were at the end of the 3rd quarter 2019 when 10 year spreads trading as low as -13bps. The Corporate issuance calendar is expected to remain busy the entire month with over $100B of issuance expected to hit, which may impact swap spreads further and thus may influence mortgage spreads in the near term. At the same time, IG spreads are tighter despite the heavy issuance with Markit CDX trading in the 43.5 range and overall a good sign for mortgage spreads and the Fixed Income market at large. GoGo Gadget spreads!!! (Corny, but had to.)
Over in our world of commercial real estate finance, both balance sheet and securitization lenders are looking to start the year off with a bang, once again battling to build and preserve pipeline. On the balance sheet side, banks and life companies have come out of the gate quoting very aggressive pricing and loan terms to win assignments, and to add to what is already being considered a very robust pipeline of loans in process to start the year. On the securitization end, CMBS, CLO, and Agency lenders are also looking to start the year on a strong note and build off the momentum gained from late 2019.
For Fannie Mae and Freddie Mac, the new year is simply a continuance of the status quo given the five quarter scorecard allotment from FHFA, which began with the 4th quarter of 2019. Both Agencies continue to quote “mission-rich” business at aggressive credit fee levels and terms seeking to fulfill that 37.5% affordable mission mandate as quickly as possible, while taking a somewhat more conservative approach for the more conventional side of the business, or those transactions which fall outside the 37.5%, and particularly now with talk of releasing the two mortgage powerhouses from conservatorship gaining more steam.
While volume to start the year has been somewhat muted, which is typically the case, we expect pipelines across the securitized lending sector will pick up as we head into conference season in the weeks ahead. Next week, Miami will play host to a couple thousand CRE and CMBS professionals parading around in blazers and suits in the heat of the day at the annual CREFC conference. The following week the multifamily side will have their day in the sun as the NMHC Annual Meeting takes shape in Orlando. Unfortunately, I will not be in attendance at either of the two extravaganzas, but will be out in full force next month in San Diego for the annual MBA/CREF conference. For now, please see our summary below of the happenings in the CMBS and Agency CMBS pricing and trading world.
CMBS – Volume on the New Issue front has been dormant to start the year. With most participants focused on next week’s CREFC conference, activity is expected to remain muted for the time being. Secondary spreads have tightened slightly since the start of the year with 10-year AAA bonds trading anywhere between 80-90bps over swaps, depending on issuer shelf. Lender pipelines are healthy given the low-rate environment so we do expect volume to surge at some point late 1st quarter into the 2nd.
Agency CMBS (DUS, Freddie K/FRESB, GNMA)
DUS – Lite volume out of the gate to start 2020, which is typical for January. At this point DUS TBA spreads are steady to slightly tighter with investors looking to add given the short amount of supply hitting the markets. We are seeing generic sized transactions clear at the following levels over swaps: 7/6.5-L50’s, 10/9.5-H50’s, 12/11.5-M60’s, 15/14.5-LM70’s. SARM’s are clearing the MH60’s over LIBOR. Smaller pools below $3MM at higher premium levels continue to trade anywhere from 4-8bps back of these levels. While the market will continue to take its cues from the broader CMBS and Corporate Bond markets, which are not immune by any stretch to geopolitical risks, for the time being, we are constructive on DUS spreads and believe there is room to tighten further from here, especially given the tighter delta to AAA CMBS and assuming the typical subdued January supply we have become so accustomed to continues.
Freddie K/FRESB – The New Issue calendar on the Freddie Mac end is nearly dormant for this month with just three transactions scheduled to be announced. On that list, Freddie will come to market next week with their first FRESB of the year, SB70. In keeping with the overall theme of the CMBS market, secondary spreads have been steady to slightly tighter with 10 year A2 Freddie K’s clearing in the LM50’s over swaps. The first Fixed Rate K-Deal of 2020 is not expected to be announced until the 3rd week of January and will be a roughly $1.5B 7-year transaction.
GNMA PL/CL – As has been the case with most products to start the year, volume on the GNMA end has been no different with muted supply as is expected. Over the last week we have seen spreads grind tighter for GNMA PL’s, and a quick reversal from the late 2019 swoon, which saw spreads hit their widest levels of the year. Spreads on $103-$108 premium bonds are clearing in the L80’s over swaps with lower par and higher premium bonds trading marginally to, in some cases, significantly wider from there. CL’s are trading roughly 55-60bps wider. Depending on the geopolitical landscape and its impact on Treasury and Swap yields, we are currently positive on GNMA spreads thinking they are cheap and believe there is plenty of room to tighten further from here.
That’s all for now. Have a great weekend.