So is the recent global market volatility just October being October? Or is there something deeper going on that all of us – except for the next young Tech/Financial millennial wizard holed up in an 8×8 room somewhere in Wyoming – seem to be missing? This is a perplexing question that even market pros appear to be struggling with.
The recent volatility has me so confused. It’s kind of like when my wife gets angry, and there is clearly something wrong, but I can’t figure out what it is and no matter what I do I’m likely doomed. Nonetheless, when looking at everything from a bird’s eye view, there is no one thing so out of the ordinary that is taking place which would be cause for the greater market turmoil and volatility we are experiencing. It’s earnings season and results have been mixed. We’ve seen concerning results from some in the Tech and Retail sectors, while results in financials have been mostly positive and better than expectations.
Geopolitical concerns and trade rhetoric continue to be rampant, but again, nothing outside of what has become the norm over the last few years. Some are even throwing the notion that all of a sudden the Fed is over-reacting with their stance on short-term rates and inflation. Up to now, these concerns haven’t been as big of an issue in the markets, as is evident from the flatness of the yield curve and the inability up until the last month for the long end of the curve to really break out on yield and separate itself from its peers on the short side of the curve.
Concerns regarding the financial condition of Italy and some of the more significant members of the EU remain a persistent concern that seems to be swapping between EU members over the last handful of years. At the same time, corporate America is surging. The numbers coming out key economic reports have been mostly positive and unemployment is at an all-time low, with consistent job growth over the last six to seven years. So in essence, what is different that is going on now that would cause all the recent heartburn and the baby boomer generation to start giving everyone a vital lesson once again on the value of a nickel?
Personally I can’t figure it out and neither can many of those much smarter than me (or is it I?), but my bet is this move in the market is more emotionally driven by market participants concerned that perhaps valuations have hit a peak, Interest Rates are “too high,” and, yes, October doing its usual thing of consistently being the most volatile month of the year for the overall markets. It’s been brutal out there, and aside for the market rally yesterday – which futures are showing will be wiped out this morning after poor earnings from Amazon and Alphabet – the market nosedive seems to be in full swing mode. As comedian Amy Poehler likes to put it, “This is no time to panic, so long as you are the richest man on earth…”
This morning Treasury yields are down across the curve by roughly 2-4bps as the Equity selloff overseas intensified overnight following the Amazon.com and Alphabet earnings reports, while domestic futures are pointing to a sharp decline at the open. The 10-year Treasury yield is trading inside of 3.10% for the 1st time in over three weeks with the 2-year yield declining to 2.81% and the 2- to 10-year yield basis sitting in at 28bps this morning.
The flat yield curve remains a concern for some as all eyes continue to focus on what the Fed’s next move will be at their next meeting on November 8.
Over in the Commercial Real Estate markets the words of description I like to use, similar to the overall market volatility, are “complicated” and “confusing.” With the rise in interest rates, Originator concerns regarding dwindling Q4 pipelines was clearly a concern and as expected. If the competition on loan pricing spreads wasn’t fierce enough throughout the year, it has only gotten more aggressive with spreads from CMBS, Life Companies, Banks, and other private sources being quoted even tighter over the last few weeks to help alleviate some of the pain with the uptick in Treasury and Swap yields. All this despite the greater market volatility and the domino effect it has had in the Asset-Backed securitization markets.
With Corporates and CDX spreads trading wider, New Issue CMBS bonds are now trading hands in the high 80’s over swaps. The Asset-Backed volatility has indeed spilled over to our markets in Agency CMBS where spreads this week seemed to be the most volatile. Vanilla Fannie Mae DUS investor spreads widened anywhere from 6-10bps across the curve this week with unfortunately no end to the pain in sight, so long as the greater market volatility continues.
Despite the widening in spreads, DUS activity from Originators remained very heavy this week which likely also added to the pain, as supply far outweighed demand. In addition smaller loans, those under $5MM, seem to be getting hit the hardest with spreads wider by 2-3bps versus where average markets are falling. On the Freddie Mac side, their most recent 10-year securitization, FHMS K082, priced in the market with the A2, 10-year average life bond, pricing in at swaps plus 59bps, a tad wider than initial talk and sharply wider from the most previous deal to price in the market.
Despite all this, at the loan level end, Freddie Mac continues to quote extremely aggressive for the right transactions and in line with where the overall markets are quoting on Commercial Real Estate loans.
On the GNMA front, spreads were wider this week, in sympathy with the widening throughout the mortgage sector. Spreads over swaps on Project Loans and Construction Loans were being quoted roughly 5bps wider across the price dollar curve from the previous week.
Outside of that, there is nothing else new to report on our end. Pulling for the Dodgers here in the World Series versus the Sawx, though they clearly have a hill to climb. Have a profitable day and a marvelous weekend!