Well, that happened pretty quickly. As my 1980’s idol Ferris Bueller likes to say, “Life moves pretty fast. If you don’t stop to look around once in a while, you could miss it.”
I’m not referring to all the holiday commercials now hitting the screens, though it’s amazing how quickly that has crept up on us as well. No, my comments are purely from a market perspective. Out of nowhere, the market has come roaring back a mere week after being on the verge of an utter meltdown with folks running for the windows in a sheer sign of desperation.
Yes, everything in the world is good again. Timing is interesting as well with the midterm elections coming this Tuesday. That, however, is a topic for a separate forum. Either way, while Q3 2018 earnings continue to be mixed – Alibaba up, Amazon down, etc., etc., other key data coming out of the domestic economy continues to impress, particularly this morning’s unemployment report for the month of October, which reported a 250,000 increase in jobs added, with wages increasing 3.1% and breaking the 3% mark for the first time since 2009. The unemployment rate has remained steady at 3.7%, the lowest since man defied all odds and stepped on the moon.
In addition – as has been the case for quite some time – Trade rhetoric is at the forefront, this time with a more positive attitude earning the spotlight as President Trump has reportedly suggested he wants to cut a trade deal with China later this month and has requested his cabinet to begin drafting terms for a talk. The fright of October is now behind us, thank goodness, and November is being welcomed with a nice big bear hug from most market participants. So in the end, whether Ed Rooney likes it or not, Ferris was right. Things move very quickly and if we don’t like it, we just need to learn to deal with it.
Stock Futures are currently pointing to a sharply higher open feeding off the three-day rally in the markets and on the heels of the positive Trade rhetoric coming out of Washington as well as the job report released earlier. Treasury yields are trading higher as well with the 10-year UST yielding in the 3.18% range and roughly 3-4bps higher from yesterdays close. The curve has remained at its flat level with the 2-year to 10-year sitting just inside 30bps, currently at 28bps.
Much like the rest of the markets, one would expect the Mortgage Securitization Market to make the turn by reacting to the positive mood and beginning to tighten. Well, unfortunately, that has not been the case. Much like Danny Zuko we are being “Stranded at the Drive-In.” (For those of you who don’t know what I am referring to, ask your Generation X neighbor.) While during the last few weeks RMBS, CMBS, and Agency CMBS were all widening with the greater market volatility, now the issue out there is volume. Yup, good old Economics 101. Supply and demand. There is just way too much volume hitting the screens as we head into the meat of the Q4 2018, and MBS just doesn’t want to tighten. Even with the rally in the global markets, things on our end are wider. In CMBS land this coming week, three transactions are expected to price: two multi-borrower and one single borrower, totaling $2.5B. With AAA CMBS now trading hands low 90’s over swaps, it will be interesting to see where the next new issue wave clears.
The volume in Agency CMBS has been massive. This week, Freddie Mac priced three new issue securitizations. Its latest 10-year fixed rate K083, which saw the A2s 10-year average life clearing at swaps plus 63bps. In addition, Freddie priced a 7-year fixed rate, K733, at swaps +43bps and its latest 7-year floating rate securitization at LIBOR plus 39bps. All in all, roughly $3.3B in new issue from Freddie alone this week.
On the Fannie Mae DUS side, originators were extremely busy transacting, looking to pave the way in their pipelines for a busy last two months of the year. Over $3B in new issue DUS hit this week, and the market did not take to with the most open of arms. Spreads seemed to get wider on each deal pricing out in the market as dealer balance sheets are full to the core and third-party investors seem disinterested in all the volume hitting at once. All in all market spreads are wider, anywhere from 12-15bps since the market turmoil began a few weeks ago.
The lone positive this week in our markets has been GNMA’s where volume was somewhat muted and spreads remained fairly stable for both project and construction loans.
Nonetheless even with the volatility continuing on the mortgage securitization front, Commercial Mortgage Lenders on all ends, both balance sheet and securitized, continue to quote aggressive terms on most transactions, fighting tooth and nail to get business in the door. May the best lender win.
That’s all from us for now. Have a profitable day and an even better weekend!