It was a week dominated by geo-political tensions as well as domestic political disputes (what else is new) and amazingly despite it all, domestic U.S. markets have held up pretty well as the major Equity indices continue to slowly drift towards the all-time highs we toggled with earlier this year. For now, or this week at least, it seems like the Fed and future monetary policy changes are sitting in the rear view mirror while market participants closely monitor the situations unfolding in Syria, the UK Brexit negotiations, Hong Kong protests, as well as the continued developments regarding Trade negotiations between the U.S. and China, the impeachment proceedings/debacle (depending on which side of the aisle one leans), and of course, the comical road for some to the democratic nomination. Thus, the markets certainly have its fair share of fodder to digest, and despite it all, continue to remain resilient in the face of some adversity, and at the same time, kind of reminds me of the determination on Daniel Larusso’s face as he tries and eventually succeeds in catching the fly with the chopstick.
Now while that may be stretching it a bit, and the likely case is none of us have ever succeeded in doing so (let alone tried), the reality is the domestic markets seem to be on auto-pilot despite all of the above, which is largely due to the agreement in principle set in place last week on the “1st phase” of trade negotiations between the two best of friends in the world, Trump and Xi. I mean let’s be honest here, as trade goes, so will go the markets, and it’s been that way since November 2016. So despite tensions overseas in the Mideast between Syria and Turkey, the subsequent political debates amidst all of our fearless leaders in D.C. on the President’s decision to withdraw from the region, negotiations on a bona fide Brexit, and talk of impeachment (why again?), the bottom line is everything will, in all likelihood, continue to provide some appeal to the back and forth trade talks and give us common folk something else to speak about, much like Tonto providing the Lone Ranger some much needed secondary charm.
At the same time, we cannot ignore the 3rd quarter earnings season which was in full swing this week, where for the most part, corporate earnings mostly led by the financial sector have reported better than anticipated despite whispers of a pending contagion on slowing economic growth making its way here to the mainland. For now, I would like to sit back and enjoy watching the S&P flirt with 3000, 10 year Treasuries stabilize in the 1.70’s, Credit spreads in most sectors continue to tighten, and continue to watch my favorite of all, the television show in D.C., which is ready to begin its 4th season.
Watching the president, “Nervous” Nancy, and the whole impeachment crew in D.C. continue to battle it out and pray for each other’s mental well-being reminds me of a well thought out WWF story line back in the old days with “Mean” Gene and Bobby “the Brain” somehow getting caught in the middle of all the back and forth hollering between the baby face and the heel. The difference is on the D.C. show, it’s not so clear cut who is the baby face and who is the heel, and that is solely up to each individual’s view on the whole situation. Either way, this commentary is not meant for political debate, and like Michael Knight telling Kitt, I probably just need to “shut up!” and focus on the markets.
This morning the latest Chinese growth data is in focus following reports that GDP in China over the 3rd quarter rose by the smallest margin since the early 1990’s, a fallout from the tariff war perhaps, and providing further proof to those on the global recession bandwagon. At the same time, corporate earning this a.m. out of Coca Cola and American Express continued to show the opposite message with a stronger outcome than expected on both ends. Thus on the heels of the mixed bag of data, stocks have opened slightly lower this a.m. with Treasury yields opening flat for the most part to the prior days close as the 10 year is currently trading in at 1.75% with its two-year buddy yielding 1.59%.
At the same time, we continue to closely monitor yields from our overseas counterparts in absolute utter astonishment as the 10-year German Bund and 10-year Japanese bond continue to trade in negative territory with a -0.37% yield -0.13% respectively, equating to a 213bps and 188bps delta to the U.S. 10 year. Depending on how you view it, 10-year yields seem cheap at this level, and there is room for further compression back to the 1.50% level we witnessed a few weeks back, if not further inside. Yet despite it all, the toggle in U.S. yields both in treasuries and swaps will likely continue to play out as an outcome of economic and political tensions and remain resilient in the face of adversity simply because “Goonies never say die!” Amazingly, I don’t think I have ever referenced Goonies in this commentary to date. Shame on me.
The competition over the last few weeks for commercial real estate loan assignments has become fierce. At this point, the Agency pullback on S&G pricing from July and August seems like a distant memory as the two mortgage giants grapple with and settle into the new FHFA scorecard requirements, and much like Clubber Lang, they “pity the fool” who gets in their way, thus reopening the highway for each to compete with the like of CMBS, banks, and life co’s. While the focus continues to be on highly affordable and mission-rich transactions, we are beginning to see a new wave of aggressive quoting for your vanilla conventional transactions.
On the investment side it seems spreads have found some form of firm footing with AAA CMBS leading the way, and for the most part, new issue deals rolling off in the low 90’s to swaps, depending on shelf and collateral quality. While this is currently wide to the 2019 tights we believe there is room to tighten from here, and given the increase of multifamily in deals following the summer Agency pullback, that should help the credit quality further of some transactions scheduled to hit the market over the next few weeks and months. With that, Agency CMBS investor spreads over swaps have settled in the following areas: DUS 10/9.5 trading H60’s, 7/6.5 H50’s and 12/11.5 M70’s, with small balance deals and higher premiums trading nearly 10bps+ back from those levels. Volume on the DUS side has tapered these first few weeks of the 4th quarter and that is largely, if not all but due to the summer Agency pullback making its way through the system at this point in the year. Alas, we are hearing/seeing DUS pipelines firm up again thanks to FNMA’s renewed focus on the heels of the scorecard release, and as we gear up for what has the potential to be a monster final two months of the year, which of course may place some pressure on investor spreads heading into yearend, outside of the typical year end liquidity pullback.
On the Freddie Mac end, they are out in the market with their most recent 15-year securitization expected to price today. Secondary recent issue 10 year A2 bonds are trading hands in the H50’s over swaps with the delta to AAA CMBS roughly 35-40bps, and wide of historical consensus. This can mean one of two things. CMBS tightens from here, or Agency CMBS widens. The jury is out and uncertain on that front much like Angela Bower always being uncertain about Tony Micelli’s capabilities as a housekeeper in Fairfield, CT. On the GNMA side with the pullback in Treasury yields from the 1.50’s to mid 1.70’s spreads on 103-106 dollar bonds have come in with most GNMA PN’s trading hands in the H70’s to swaps and well wider than that for low par and higher premium coupon bonds. CL’s are trading roughly 60-65bps wider from there. While a sub 2% 10 year has helped to spur business on the A7 and IRP end, the recent pullback in yield from the 1.50’s to 1.70’s has done wonders for those deals looking to execute an IRP with a fairly high prepayment penalty needing to be priced in, and in some cases, has put the kibosh on those transactions, for now at least.
Outside of the above there is nothing else new to report on our end. Have a profitable day and an even better weekend.