The world is bracing for a big showdown in Buenos Aires this weekend at the G20 summit as President Trump and Chinese President Xi Jinping are set to have dinner tomorrow night in a battle of wits, very similar to Vizzini and Westley’s, “where’s the poison” showdown in Princess Bride.
Ok, maybe it’s not quite as dramatic, but either way, rest assured markets will be carefully tuned as the next stage of the “trade war” between the two superpowers may take a dramatic turn after the two leaders break bread and lift their glasses this weekend. With the markets currently in ping-pong mode following Fed Chief Powel’s sudden change of heart this past Wednesday on the future of interest rate hikes – ala Rocky Balboa’s “if I can change, and you can change, then everyone can change” speech to his suddenly turned fans in Rocky IV – this weekend’s summit represents a focal point of sorts for investors for things to break out one way or the other.
The market volatility of the last few months has certainly kept the Zantac and Tums close. While Powell may have helped matters in signaling the Fed may be near done hiking rates (following the next meeting of course), this weekend’s summit may have the opportunity of unwinding any foreseeable optimism that may have been created earlier this week.
On Wednesday, Stocks were off to the races with the major Index’s all rallying over 2% following Powell’s speech while Treasury yields sustained a nice rally, at least at the long end of the curve, with the 10-year yield falling to just above the 3% mark on Interest Rate optimism. For the most part, money was headed in all directions, except Oil, which continued its decline to $50/barrel as supply continues to far outweigh demand in what market pros are comparing to the Oil price crash of 2008/2009. Not quite sure we are there yet. However, the Oil price action has been compelling to say the least, and it will certainly continue to have an effect on the overall markets. Either way, here we stand in the heart of the holiday season, with gleeful cheer in the air as holiday parties reign supreme, yet this cloud of market uncertainty continues to hover above us.
This morning Treasury yields are gaining ground after giving back some yesterday as a pre-summit flight to quality by wary investors has long-term Treasury yields falling with the 10-year yield currently trading at 3.01%. The 10-year is seemingly trying to make a desperate move to fight through that 3% support level only to be consistently turned away – much like the Grizwald’s being turned away from Marty Moose after their two-week cross-country journey to Wallyworld.
Despite Powell’s comments this week, the yield curve continued to flatten as short end investors either aren’t hearing it or didn’t get the message. The delta this morning between the 2- and 10-year Treasury yields is sitting at 21bps, the lowest level since the curve was inverted over 10 years ago.
Closer eyes will tell you to look out for a near-term inversion between the short end and the belly of the curve, as the 2- to 5-year basis currently sits at 3bps and continues to tighten (dramatic background music).
Over in Commercial Real Estate Finance (where things really matter), its end of year and as usual there is a lot going on. While there has been talk of some softening in loan level spreads from both Balance Sheet and Securitized lenders, we are not seeing it and the competition out there remains as fierce as ever with lenders both gearing up for a monster end to 2018 and loading up their pipelines for a full steam Q1 2019. CMBS and Agency CMBS markets remain choppy as the overall market volatility – along with a pure saturation of supply hitting at once – has market spreads trading all over the spectrum. In “big sister” CMBS land this week we saw one multi-borrower deal price out in the market as the latest deal from UBS and Soc Gen, UBSCM 2018-C14, crossed market screens with the A-5, 10-year average life bond clearing at swaps plus 100bps, the widest print of the year and 5bps wider than the previous deals to price a week earlier from Citi and Credit Suisse. Most are attributing the wider spread action on the UBS deal to market tiering based on quality and the lack of a “big” name Wall Street firm in on the transaction. Thus for market intel the new issue CMBS AAA market is more likely trading in the mid to upper 90’s at this point, in line with pricing on the Citi and CS transactions.
On the Agency CMBS side, things remain extremely volatile out there with market spreads continuing to trade in a very choppy range. Supply on the FNMA DUS side, as expected for this time of year, continues to impress, yet at the same the supply/demand factor has certainly taken its toll with investors picking their spots on which deals to bid and pass, and causing much angst amongst us Capital Markets folks here in the DUS lending community. Smaller transactions with higher premiums continue to get hit hard in the market with spreads over swaps trading nearly 7-8bps wider on those transactions, the widest I have seen in my nearly 15 years in this business. DUS 10/9.5 investor spreads over swaps are currently trading in the low to mid 70’s level with indications reaching north of 80 for smaller/higher premium deals.
On the Freddie Mac side, one new issue multi-borrower deal hit the market this week, FHMS K085, with the 10-year A-2 bond pricing in at swaps plus 65bps, in line with expectations. The New issue DUS to Freddie K basis currently sits at 7-10bps and in line with historic perspective. The concern here is if AAA CMBS continues to widen, coupled with the oversupply in the market on the Agency end, there is certainly the possibility for market spreads on DUS and Freddie K’s to widen further through year-end.
On the GNMA front, it remains choppy consistent with its cousins apart of the Agency CMBS umbrella. Also with Treasury yields falling back again towards the 3% mark we once again see some reluctance from investors on lower par coupon transactions as folks are looking for a minimum coupon yield to bid aggressively. This applies to both Project and Construction loans. At this point, call GNMA Project loans in the low 60’s over swaps with Construction trading roughly 50bps wider at the belly of the price curve.
Outside of that, there is nothing else new to report here. Eight days of Chanukah begin for me on Sunday night, so if I wasn’t on your overall holiday shopping list, this is just a friendly reminder. Have a profitable day and stupendous weekend. Reach out if you need us.