With so much going on out there that can lend direction to the markets, it seems all eyes are fixated on today’s long-awaited meeting scheduled between President Trump and Chief Chinese negotiator Liu He as the two sides attempt to move forward on a trade deal amicable for both ends of the table. Given the Stock Market moves over the last few weeks – and the positive outlook on the potential for striking a deal prior to the March 2nd deadline – one would have to assume that the President’s tactic today in trying to finalize negotiations would surely not mimic Ivan Drago’s “I must break you,” but rather be more in line with Ross trying ever so hard to convince Rachel that they “were on a break!!!”
This morning, Treasury Yields opened a couple of basis points lower across the curve while Stock Futures are pointing to a higher open after a rare off day yesterday, as the market pays close attention to both today’s trade meeting in DC – as well as the flood of Fed speakers scheduled to address the markets at various points throughout the day. The 10-year Treasury yield is trading in at 2.67% and in line with the recent 2.63% – 2.69% trade flow we have become accustomed to over the last few weeks. The yield curve has maintained its shape with the 2- to 10-year delta trading in the 15-16bps range.
Given the signals of a Fed pause, the pace of short term yields outpacing the longer end of the curve has certainly taken a vacation. This is after what many thought (including this historically wrong genius) would have been an inverted curve at this point of the market cycle. Nonetheless, with the prospects for growth continuing to show signs of weakness, curve pundits are still buying into the inverted curve theory at some point in calendar year 2019.
Commercial Real Estate Conferences and Insights
Last week about 3,500 Commercial Real Estate professionals, all looking their absolute best and having the same conversation over and over again like a speed dating contest, converged in San Diego for the annual MBA CREF conference. Overall, despite the fact that nearly half the people came back home with the Flu (seriously someone came armed and was on a mission to infect), the mood at the conference was mostly positive and upbeat. Many expect similar volume levels out of the CRE finance market as compared to 2018 with pricing and credit terms expected to remain aggressive across all executions.
In the securitization markets, while generic CMBS volume is expected to be slightly down, volume on the CLO side is expected to see an increase over 2018 with more issuers entering the fold. On the Agency CMBS front, both FNMA and Freddie Mac expect volumes to be similar to 2018 with a major focus on affordable housing and Small Balance expected to continue to dominate. Nonetheless, volume continues to be slow out of the gate to start 2019, as expected for this time of year, which has played a major role in the spread tightening we have seen over the last 4-6 weeks. However, with conference season now winding down, the expectation is that volume will pick up pretty quickly with a mad dash to get deals done over the next six weeks and the possibility of rounding out Q1 2019 with a bang.
This week, Freddie Mac priced two deals out in the market including its latest 15-year Fixed Rate securitization, FHMS K1510, which priced in line with expectations, as well as their latest Floating Rate Securitization, FHMS KF58, which also priced in line with market guidance at Libor +50bps.
Speaking of LIBOR, with the market Index set to be retired in just over two years, a major source of gossip at the conference has been the position the agencies will take on its replacement and pricing existing and new loans that will be in the “rollover” period. At this point, with the average life of an ARM being in the three-year range, that rollover period is already the talk of investors and the uncertainty has likely lent to some widening in Floating Rate spreads over the last few weeks. There is still no guidance as to what the Agencies plan for the product and you kind of get the feeling they, much like everyone else, just wants the problem to go away and for LIBOR to remain.
On the DUS side of things, spreads continued to improve for anything north of $5M, with vanilla TBA 10/9.5 spreads over swaps trading hands in the low to mid-60s, a little more than a handful wider versus where new issue Freddie K’s are expected to price. As has been the case for quite some time, tiering on loan amount continues in the market with loans below $5M priced at higher premium levels trading at much wider spreads, in some cases nearly 7-10bps wider. Additionally, while the DUS curve continues to show improvement, we continue to see weakness for longer duration structures as spreads on the long end of the curve are failing to keep pace with the rest of the market, given third-party investor reluctance to add duration in the current environment.
In GNMA land, with the shutdown now well behind us, one would have expected more activity on the rate lock front over the past few weeks. While things have picked up, it certainly has not been at the pace the market would like to see. Despite it all, spreads have improved with the overall markets but definitely not in step and at a much slower stride. Par coupons continue to trade wider with the belly of the price curve, 103-106 coupon yielding bonds, garnering the most interest as investors continue their never-ending search for yield. Call spreads in the low 80s over swaps for the belly and a handful wider for coupons closer to par.
That’s all from us today. The effects of the Flu have worn off here. Have a terrific weekend.