As Hurricane Florence targets its evil eye over the Carolinas, we wish all of our dear friends caught in the path of the storm the best and hope everyone remains safe. Don’t be encouraged by the soft name of the Hurricane. Always misleading. This is not your Aunt Florence coming to pay a visit. Having lived through Hurricane Sandy nearly six years ago, we here in New York never broke out into spontaneous song and dance ala Sandra Dee in Grease. We know the facts and these storms are dangerous, so please play it safe.
Speaking of hurricane names, they should really re-think the names given to these storms. Florence just doesn’t instill fear into anyone’s mind. They should consider names like Spike, Dragon, or Ursula. That should get folks attention.
Despite the incoming storm, domestic markets continued to perform very well this week, with Equity markets leading the charge and the major indices flirting once again with all-time highs reached earlier in the year. The positive feeling in the markets is so rampant that thoughts of Mortimer Duke telling Randolph Duke, “We’re Back!!” in the famed 1980’s classic Coming to America comes to mind. (By the way for those of you reading this now and thinking, “Casden knows nothing about 80’s movies” because this line is from Trading Places, you are dismissed for the day and are encouraged to watch both movies again.)
This morning, Treasury yields are continuing their upward trend as the 10-year flirts with the famed 3.00% mark despite the weaker retail sales numbers.
Of note and some concern is the continued flattening of the yield curve with a mere 22bps delta now separating the 2-Year and 10-year Treasury yields. While the focus has been on the thriving equity markets, we cannot simply discount the fact that we are headed towards inversion of the yield curve, and it may very well happen sooner rather than later. We are already witnessing an inversion in the forward swap curve market, perhaps a signal of things to come.
Commercial Real Estate Outlook
As we round out the third quarter and turn the page into the fourth, the year-end push for volume in the commercial loan space is heating up. The market and competition for loan assignments remain hot and as competitive as ever. The typical second-half pullback in lending parameters and pricing we have seen in the past from multiple lending sources is just not existent this year with CMBS, life companies, banks, etc. all fighting tooth and nail to win every decent deal out there. While the terms being quoted are not reminiscent of 2006/2007, we may not be that far off. Despite it all, the Agencies have begun to pull back in the number of waivers they are providing, particularly on pricing, citing they are on track to reach their target goals for the year with no need to be ultra-competitive. Unless you have a highly affordable rich deal with a repeat sponsor it may be challenging at times to compete with the terms some other lending sources are throwing out there.
Things remained quiet this week on the new issuance of CMBS, and corporate spreads showed continued signs of compression. On the Agency CMBS front, there was decent volume in DUS space this week with over $450MM in volume hitting the screens. Market spreads have held in very well across the curve with vanilla structures seeming to be the go-to for most investors. 10-year DUS spreads over swaps are trading in the high 50’s. Nonetheless, we continue to see spread tiering based on loan size, with pools less than $3MM getting hit harder by a decent chunk, close to a half-point in spread (call it about 6-7bps on a 10yr), out in the market. Freddie Mac had a busy week pricing two securitizations in the market. First to go was the $1.3B FHMS K80 10-year transaction which saw its A2 bond clear at swaps plus 53bps and in line with expectations. Freddie also priced its latest Small Balance execution, FRESB SB53, with all bonds pricing in line with market talk.
The GNMA market has been the quiet talk of the Agency CMBS market with spreads tightening roughly 5bps throughout the week, in line with the increase in Treasury yields, as would be a typical reaction for the GNMA market. The fancy of the market continues to be the belly of the price coupon curve with par and higher premium coupons trading wider. Also, pool sizes below $10MM are attracting more interest given the relative ease of placing these pieces in a REMIC execution. With three new issue CMBS transactions expected to hit the market next week, the Agency CMBS side is sure to keep a close eye on our big sister and the potential impact these transactions may have on overall market spread volatility.