Things were going so well over the last few weeks. Maybe too well. Stocks were trading higher. Commodities were improving. Treasury yields were in check, and Fixed-Income Spreads were having their traditional start of the year rally across most sectors. Not a bad start for 2019.
In fact, things were going so well that it must have been as good a time as any for members of Congress to unveil their plan to spend hundreds of trillions of dollars on the proposed “Green Deal,” where our homes will be invaded and energy guzzling motor vehicles confiscated to ensure the earth doesn’t explode in 10 years from now.
Rest assured, however, it’s all free and who wouldn’t be on board with that, right?
Either way, politics aside (we will come back to that shortly), the positive mood in the markets over the first month of the year was rampant. However, as we all know, mood changes happen like a bolt of lightning. As everyone’s favorite scientist, Dr. Emmett Brown says, “unfortunately you never know when or where it’s ever going to strike.”
The past few days have been concerning, to say the least. Renewed concerns stemming from slowing global growth, the pending February 15th deadline to reach an agreement to avert yet another potential government shutdown, and trade concerns with China have once again taken center stage, and are now overshadowing the ever important debate regarding the demeanor and style of hand clap House Speaker Nancy Pelosi displayed during this week’s State of the Union address.
Somewhat bizarre to analyze, but to quote Andy Clark, “We’re all pretty bizarre, some of us are just better at hiding it.” –Breakfast Club, 1985
Be that as it may, here we stand again wondering what’s going to happen with trade, as reports continue to surface that negotiations still have a ways to go and an agreement will likely not be in place by the end of the 90-day “truce” on tariffs. Speaking of agreements, the Presidents February 15th deadline is quickly approaching for an agreement on border security, border wall, border funding, etc. You can call it what you want, but if the last few months have been any indication an agreement amicable to all is likely not going to be in the cards by that date and the prospects of a “Kumbaya” singalong are not worth betting on. That’s what I gleaned from watching Pelosi’s hand clap the other night.
The results at this time on our end are weaker and duly concerned markets, now choosing to ignore any positive economic results such as jobs, jobs jobs and now waiting to see how the likely inevitable will either rattle or stabilize things further.
This morning Treasury yields are opening flat to slightly lower across the curve as Stock futures are pointing to a lower open following yesterday’s sell-off on the heels of the above. The 10-year Treasury yield is trading in the 2.65% range, just 10bps off the 6-month lows of 2.55% and an astonishing 58bps lower than the highs we saw merely three months ago.
At the same time curve pundits are once again in focus as an inversion at the short end of the curve has once again taken place with 2-year yields outpacing its 5-year friend by 2bps and the delta to the 10-year sitting at a meager 17bps.
As is typical to start the year, the market in Commercial Real Estate Finance has been hot with most capital sources once again throwing their hats into the ring fighting to win every decent piece of business out there. While volume to start the year has been subdued out of the gate, the expectation is that things will quickly turn around once conference season ends towards the latter half of this month. Overall, terms and loan spreads being quoted out in the market have picked up exactly where things started back in 2018 as lenders try to give a new meaning to the word aggressive (or stupid if you think like me).
Spreads in CMBS continue to see marked improvement with AAA 10-year bonds trading hands in the low- to mid-90s over swaps. The latest New Issue Multi-borrower deal marketed from Goldman and Citi, GSMS 2019-GC38, has guidance out at 91bps over swaps with the potential for things to go even tighter. Of course, the feel-good story comes with the broader Fixed-Income markets and the tightening we have seen in CDX has certainly made its contribution. This, of course, has spread to the Agency CMBS side where New Issue DUS and secondary Freddie K’s and FRESB bonds continue to enjoy tighter spreads with a bias to potentially further improve barring any further market meltdowns, something which can’t be ignored given the market volatility of the last 12 months. Ten-year DUS TBA spreads over swaps are now trading in the low- to mid-60s, as Freddie 10 year K’s have tightened to the upper 50s level over swaps.
This coming week New Issue activity on the Freddie Mac side is expected to increase with both a 15-year Fixed and 7-year Floating rate securitization both expected to hit the market. The tightening seen in DUS has been limited to the 5- thru 15-year portion of the curve as longer duration bonds are no longer the fancy of many given the shape of the curve, and those with shorter or more flexible call protection getting hit hard on premium levels many might be seeking. Spreads on that end have struggled to break out as investors are choosing to reposition their focus to other points on the curve.
Now that the recent shutdown has come to an end, at least for the time being, the GNMA market has had a chance to restart its engine, albeit on limited supply hitting the market given borrower concerns with moving forward on anything FHA related until clarity regarding future government operations are laid out in stone. Spreads on the GNMA front have improved with the belly of the price curve, $103-$106 Coupon-yielding bonds, being the investment of choice and clearing at tighter spreads over swaps, given the rally in Treasury yields back in the 2.60s. With the MBA CREF conference scheduled for early next week, most market participants will be enjoying the sights and sounds of San Diego. I know I will. Thus, liquidity may be somewhat thin to start the week.
That’s all from us for now. Have a stupendous weekend!