Job report Friday – not sure if that is the official government name given or not – is always a fancy of the markets no matter which side of the spectrum you may be sitting, be it Equities, Bonds, Commodities, etc. This morning’s print showed the market added fewer positions in September (134K) than initially expected (185K), with the unemployment rate dropping to 3.7%, versus an anticipated mark of 3.8%, the lowest mark since man defied all odds and stepped foot on the moon.
Many are attributing the weaker monthly print to the effects Hurricane Florence played on the economy last month. Others are simply envisioning a cooling off of the “hot” employment market we have been witnessing over the last few years. While predictions will always be plenty, what is certain is that nearly every market watcher is closely anticipating and scrutinizing the results. Additionally, August numbers were revised sharply higher (201K up to 270k).
Speaking of markets, the theme this week has been rising rates and the piercing movement we have seen globally in yields, particularly here in the US, after Fed Chief Powell spooked markets by validating that current market data may, in fact, suggest the Fed is likely to move on short-term rates more than anticipated and past the neutral level. 10-year Treasury yields are currently trading at their highest level since 2011 as the benchmark yield has broken through the feared 3.20% mark, and is up nearly 14 basis points from the start of the week. This paves the way for some major heartburn for those looking to lock in debt rates, particularly on transactions underwritten when 10-year Treasury yields were hovering in the 2.85% range just a mere month ago. However, while the selloff in yields globally seems to be the trend, at least here in the short term, the confused counterpart of the market this week has been Equities.
After reaching all times highs on the major Index’s earlier in the week, mostly due to optimism surrounding the US economy and the acceptance on the part of many that the markets are in fact finally ready, willing, and able to absorb a higher interest rate environment, yesterday saw the opposite with Equity markets not only spooked by a Tech sell off and fiscal concerns over Italy’s sovereign debt, but also the realization/thought that “wait a minute, are these higher yields truly here to stay?”.
This kind of reminded me of Kevin Arnold wondering if Winne Cooper “likes me” or does she “like like me?”. No clear direction and just confused from all angles. For the rest of today with payrolls now behind us, the everlasting Kavanaugh saga will be front and center once again with a potential vote in the Senate on the confirmation expected for today, or at least some hope.
With the recent selloff in rates, Commercial Real Estate Finance has certainly not been immune to the pain and the 35bps month-over-month increase in yield has certainly left its mark on originator pipelines globally. At this point, the pressure is on all internal Credit and Capital Markets teams to somehow find more cash flow in the underwriting and loan spreads and get that Net Cash Flow number up just to be able to save face with clients and make deals work.
While the run-up in rates is not at all the fault or in the control of lenders and investors of Commercial Real Estate loans, the bottom line is the potential influence and dent this may instill on originator debt pipelines is sure to be impactful. This can lead to tighter credit and pricing standards just to “outdo the other guy” and keep/bring business through the door. With the surge in rates over the last few weeks, we have seen a substantial increase in investor appetite on the Agency CMBS front for DUS, Freddie K’s/FRESB, and GNMA Project Loans.
Spreads over swaps on Vanilla DUS structures have come in nearly 5bps points over the last few weeks, unfortunately, though not lock in step with the increase in Treasury yields. 10/9.5 DUS Structures are now clearing mid to high 50’s over swaps with some higher levels for tiering on loan sizes below $3MM. Volume this week on the new issue DUS side was sizable despite the increase in rates with nearly $400MM+ brought to market by originators. Freddie Mac priced their latest 10-year securitization this week, FHMS K081, and saw the A2 10-year average life bond clear at swaps +52bps and in line with expectations. Bonds in the secondary were trading tighter as well with spreads coming in following the increase in yields. Perhaps the asset most vulnerable to movement in rates, GNMA Project loans continued to tighten with spreads in by about 5bps week-over-week as higher coupon bonds are bringing many REMIC investors back into the fold while also paving the way for a market more accepting of par and low premium pools.
Big sister CMBS saw a quiet month for multi-borrower new issuance as CMBS lender pipelines have suffered through a rough time keeping up with the demand and competition in the overall Commercial Real Estate market. For now, two multi-borrower deals from Wells Fargo and Morgan Stanley are in the works and expected to price perhaps next week, with initial whispers on the AAA 10-year class being shopped at 80bps over swaps.
That’s all from us today. Huge playoffs series starts tonight, Yanks vs. Sox.
All Rise for the Judge and Yanks in 5! Have a profitable day!