With Thanksgiving less than a week away – feels like I just finished throwing out my leftovers from last year – much like the famous song we all love to begin hearing this time of year, it’s definitely beginning to look a lot like Christmas (Chanukah if you’re in my tribe). Hope that everyone in the New York metro area made it home safely last night – or at least was able to get a few hours of shuteye in their car.
Unfortunately, we can apply that same cheery tune and rewrite the lyrics describing the latest market volatility from this past week and sing “it’s beginning to look a lot like October….” Yeah, I know the tune doesn’t really fit and unfortunately, I am not witty enough to come up with a full rewrite of the lyrics, but you get the gist. The truth is, it currently is not quite as bad as it was throughout last month, but there is some hemming, hawing, and angst going on as we head into the final two weeks of this month and enter the official start of the holiday season. Catalyst(s)? Good question.
Market Overview and Outlook
Trade Wars for one is at the top of the list, as concerns that a deal between the US and China on trade may be more difficult to strike than even the experts seemed to think – and certainly it may not be as simple as Don Corleone making Luca Brasi and “offer he can’t refuse.” However, it goes past that. Political concerns in Europe have once again dominated headlines as Brexit talks take center stage causing much political upheaval within our dear friend and colleagues overseas. At the same time earnings continued to be mixed with Tech stocks taking a hit as evident with the volatility seen in the NASDAQ, and fears/concerns of a reprisal of the dotcom and tech volatility of 20 years ago.
Also, with House and Senate now split, fears of a true deadlock in DC will always take center stage in the markets someway and somehow. And of course, the driver of most markets (especially if there is nothing else going on), oil has made many headlines this week, as a global decrease in the price-per-barrel continues to turn heads. At the start of October, the price per barrel was $76. We fell to as low as $55 earlier this week currently sitting in around $57, as a glut of supply in the market has many investors on edge. As some like to say – or at least I like to say – as oil goes, so goes the markets. Historically true, but let’s see where things take us over the next few weeks. Nonetheless, here we stand ahead of what is a short trading week next week, with many items in question that can drive global markets in either direction.
This morning Treasury yields are continuing a slight rally on a flight to safety with Stock futures pointing to a lower open due to the many reasons I note above. Yesterday we saw yields trade somewhat higher to end the day as Stocks finished off the trading session well into positive territory. This morning, however, we see the opposite with Stocks set to open sharply lower. 10-year Treasury yields are trading in the 3.09% range with the 2- to 10-year yield delta sitting at 26bps and pretty much flat from where we were one week ago today as curve pundits continue to banter about the long-term market effects of a flat and eventually inverted yield curve.
Commercial Real Estate Industry Insights
Over where things matter here on the Commercial Real Estate finance side, one word describes our market: Busy. Lender pipelines across all executions are full as we head into year-end, with many looking to add even more volume over the next six weeks. Competition remains fierce as securitized and balance sheet lenders continue to battle tooth and nail to win business. In the world of big sister CMBS, roughly four multi-borrower deals were being shopped this week with one pricing out in the market. The latest transaction from Morgan Stanley and Wells, BANK 2018-BNK15, saw its 10-year average life bond launch yesterday at swaps plus 90bps, with final pricing expected today, and in line with last deal to price in the market last week from Citi and JP, BMARK 2018-B7. Out there for next week are transactions from Credit Suisse, UBS/Soc Gen, and Citi/Rialto/Ladder.
On our end here on the Agency CMBS front, volume continues to be robust and spreads continue to be volatile given the supply and greater market volatility. This week Freddie Mac priced their latest 10-year Fixed Rate Securitization, K084, with the 10-year A2 bonds clearing at swaps plus 63bps and in line with market expectations. At the same time, Freddie shopped its most recent FRESB transaction, SB55, where pricing on the Fixed and Hybrid tranches launched yesterday mostly in line with expectations. Freddie’s cousins in DC, Fannie Mae, were very active this week as well as volume from the DUS community continues to increase heading into year-end with a slew of rate lock/trading activity taking place on a daily basis and unfortunately, unless there is a specific fit out there in the market we are pushing spreads wider. Bottom line is dealer balance sheets are full and no one wants any pool less than $3MM.
So unless you have a really good Capital Markets department, and I mean really good (props here my friends), you may be left scrambling on many deals looking to clear the market with spreads on even plain vanilla transactions trading all over the place, and Small Balance transactions getting hit the hardest. Of course with the holidays quickly approaching dealers will be seeking the traditional Black Friday specials on deals which may place further pressure out there on spreads. Either way call DUS spreads wider by 2-4bps on traditional Yield Maintenance deals this week, with shorter and more flexible prepay structures trading 5-10bps wider. Volume on the GNMA side increased slightly this week and spreads were under pressure with the greater market volatility. GNMA project loans were trading 2-4bps wider with Construction loans trading on average roughly 50bps wider depending on size, draw period, and dollar premium.
That’s all from us for now. Have a terrific day and an even better weekend. It is still a slushy, icky mess after the first snowfall of the season here in NY. Hoping for a dry weekend ahead. Reach out if you need us.