Pascale’s Perspective

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    “Reflation” Trade is Back On?

    Pascale’s Perspective

    April 26, 2017

    Today’s announcement of a proposed major tax cut and last weekend’s French election “relief” has put the brakes on the Treasury rally.   The 10 year is back up to 2.30% after hitting a recent high of 2.33% yesterday.   The lack of specifics in the tax plan “tapped the brakes” on the sell off.  Details on the plan and the likelihood of it passing will affect Treasury yields for the foreseeable future. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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    Bonds Are Back

    Pascale’s Perspective

    April 19, 2017

    The recent “Trump reflation trade” related bond selloff that caused Treasuries to spike may have been premature or overdone.    The 10 year T spiked from 1.77% on election night to 2.60% last month which led to speculation that the “great bond market rally is over.”   Note that every time this prediction is floated in recent years, the bond market comes back as if in a state of equilibrium that can’t be deviated from: a.k.a. the “New Normal.”   Today the 10 year T is 2.21% after hitting a recent low of 2.18% early this week.   Why?   (1) Fiscal policy expectations are being dialed back significantly as Congress and the administration indicated that tax reform is not happening soon and there’s no consensus among the factions on the final structure.   Administration officials are indicating that August would be the earliest for a package to be done and this would probably push it to the 2018 tax year at the earliest.   Also, the expected “big infrastructure” program is nowhere in sight.   (2) Weaker than expected US economic reports (CPI actually went negative, 1ST quarter GDP expectations flattening, etc.); (3) Geo-political concerns – French elections later this month may pave the way to their exit from the EU, tensions on the Korean peninsula, Syria turning into a Cold war style proxy war, etc.; (4) Inflation – The 10 and 30 year Treasuries are indicators of growth/inflation expectations. With lower CPI and oil prices dropping, the yield curve may be flattening despite the Fed raising short term rates. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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    Fixed Rates “Watching and Waiting” for Washington’s Next Move

    Pascale’s Perspective

    March 29, 2017

    Treasury yields hit a 3 week low on Monday as the 10 year yield dropped to 2.36% on Monday (interestingly, that is exactly 1% higher than its all time low of 1.36% in the wake of the Brexit vote last July). The twin forces at work are (1) Higher yields due to continuing strong economic reports (Consumer Confidence, Pending Home Sales both outperformed expectations) combined with potential inflation (Oil is again above $50 per barrel) or (2) Lower yields due to lower expectations for tax reform and infrastructure fiscal policy in the wake of last week’s failure to pass health care reform and lingering Euro worries (Brexit fallout, Greece is “fixed” again, but Italy is in trouble). stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

     © 2017 George Smith Partners, Inc. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.

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    Floating Rates Rise With Fed, Fixed Rates Drop As the “Reflation Trade” is on Hold

    Pascale’s Perspective

    March 22, 2017

    Last week’s Fed rate hike increased floating rate indices in lock step with the Fed’s pace.  The 30 day LIBOR is almost at 1.00% (up 0.75% since Dec 2015 after sitting at nearly 0.25% for years in the wake of the financial crisis). The bank prime rate is 4.00%, also up 0.75% from a longtime low of 3.25%. However, the 10 year Treasury yield has dropped from a high of 2.62% last Monday to 2.40% today.  Why?  (1) Washington:  The uncertainty and political wrangling over the first major piece of legislation by the new administration, the highly anticipated health care overhaul, has cast doubt on Washington’s ability to execute major fiscal policy such as infrastructure investment and tax reform.  The rise in Treasury yield’s was largely predicated on the stimulative effects of the policy. (2) Inflation expectations are dampening:  Not only is the 10 year yield dropping,but the yield curve is flattening.   This is an indicator that markets do not expect much inflation.   This month’s survey of U.S. Consumer Inflation expectations indicated a record low this month.  Oil prices stubbornly remain low below the $50 benchmark yet again as stockpiles rise and cooperation among producers to limit production wanes.   Note that the Fed’s preferred inflation gauge (Personal Consumption Expenditures) is still below 2.0%. Notes from GSP’s Staff Meeting: George Smith Partners’ weekly staff meeting often includes comments and observations from our brokers based on their conversations with lenders, investors, sales brokers, etc.   A major subject this week:   transaction slowdown.  The cost of capital for construction and bridge financing is rising and rent growth is seemingly stagnating in several markets (especially for apartments as the recent boom in construction sees new units coming on line).   Also, we are seeing labor and subcontractor costs rising in some major markets due to a combination of political issues, labor shortages, supply/demand dynamics, etc.  The result is a lot of deals “don’t pencil” and there is a lull out there in the marketplace. Cap rates remain very tight in a “seller’s market”  on stabilized assets, but buyers are now underwriting higher fixed rate debt and causing a pause and reconsider their offer.  The logjam should “break” when sellers start to capitulate on price.   There is still plenty of capital (both equity and debt) looking to transact. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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    Fed Meets Expectations, Bond and Stock Markets Rally

    Pascale’s Perspective

    March 15, 2017

    Today’s quarter point rate hike and accompanying statement/press conference was a perfect “Goldilocks” moment.   The actual hike was “fully priced in” by markets with Fed Futures indicating a 93% probability.   The “action” was in the indications of future rate hikes.    Markets were hoping for a gradual and steady pace and the Fed delivered by indicating two more hikes this year and three in 2018.   This was in line with expectations and dovetailed well with recent bullish economic news, especially consumer and housing confidence.    The Fed’s confidence in the US economy is welcome news to investors and also reassuring to bond market inflation hawks that want interest rates to be “in front” of inflation.  The 10 year Treasury saw a major “relief rally” with yield dropping from 2.60 to 2.50%.    Bond investors also were reassured by a comment from Fed Chair Yellen regarding the Fed’s massive balance sheet, now at $4.5 trillion.  (Note that “normal” level pre-crisis was about $1 trillion).   Yellen indicated that the short term rate remains “the key active tool of policy” and there are no plans to sell off Treasuries and MBS bonds being held by the Fed.   Such a sell off would have been considered a “stealth rate hike” as the new supply would no doubt affect bond yields.    The Fed also got out ahead of potential rocky international news with potential unpredictable election results on tap for late spring out of France and other major Euro economies. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

     © 2017 George Smith Partners, Inc. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.

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    Fed Rate Hike Next Week Now Fully Expected by Markets

    Pascale’s Perspective

    March 8, 2017

    Today’s ultra strong payroll report not only showed great “topline” numbers (nearly 300,000 new private sector jobs vs. the expectation of just under 200,000), but it also demonstrated the jobs came from increases in construction and manufacturing as opposed to the service sector.  Employers are confident that Washington will deliver on infrastructure and deregulation.  Recent remarks by Fed committee members have prepared markets for a March increase plus two more this year.  That would put LIBOR at about 1.50% by year end.  The 10 year Treasury yield climbed above 2.50%.  Note that 2.60% is seen as a “key technical” level,. If the yield climbs above that, it could easily climb to 2.75% according to some metrics.  CMBS spreads are still tight, with full leverage pricing in the low 200’s over Swaps (around 4.60%-4.75%) and low leverage (50-60% LTV), pricing around 4.25% with lots of interest only as originators chase quality loans that push their overall leverage down. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

    © 2017 George Smith Partners, Inc. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.

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    Rates Move on Trump Speech, Fed Talk, Fiscal Policy Expectations

    Pascale’s Perspective

    March 1, 2017

    The 10 year Treasury closed today at 2.46%, up 15 bps from last Friday’s recent low of 2.31%. The 2 year Treasury reached 1.29%, the highest since 2009 (note that the 2 year Treasury is the most sensitive to potential Fed moves, as it is a “like” short term rate, while long term rates are also subject to inflation expectations). This followed a period of both equity and bond prices rising and we are now seeing the classic divergence as investors sell bonds and buy stocks. Why? (1) Inflation is back. The Fed’s preferred inflation indicator, the Personal Consumption Expenditure index, rose 0.4% in January with an annual growth of 1.9%. This is very close to the Fed’s target inflation rate of 2.0%, and the highest since October 2012; (2) Voting members of the Fed’s policy committee have remarked that a rise may be “sooner rather than later, in the very near future”. This points to a March increase, as the next meeting with a press conference by Fed Chair, Janet Yellen, is not until June; (3) Washington. Recent announcements of an increase in military spending, President Trump’s speech last night, and his meeting today with Congressional leaders with a stimulative agenda of corporate and middle class tax cuts and infrastructure spending not seen since the Eisenhower administration (a shout out to the building of the interstate system). Does this all mean the awaited fiscal policy will be happening? Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

    © 2017 George Smith Partners, Inc. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.

     

     

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    Report from 2017 MBA CREF

    Pascale’s Perspective

    February 22, 2017

    The 2017 Mortgage Bankers Association Commercial Real Estate Finance convention was held in San Diego this week. GSP sent our usual contingent of about 30 brokers and we met with 35 lenders and held countless informal meetings. The mood continues to be upbeat for the capital markets and here are some of my observations for trends in the capital markets for 2017. Banks are highly regulated (especially the money center, “too big to fail” top-tier banks), as they pull back on lending construction loans, under stricter guidelines. But many are offering bridge loan programs, often on non-recourse basis. Life Companies have plenty of capital to inject into the market this year. In fact, many are increasing their allocations for 2017 with most groups lending at around 65% LTV with spreads (for 10 year terms) ranging from T + 130 to T+240, depending on quality and leverage. Shorter and longer terms are available and some sponsors are locking in 15, 20, or even 30 year fixed rates now, especially with the recent uptick in Treasuries. Short term fixed and floating rate loans are also available and we’ve seen many branching out with creative bridge lending platforms. Debt Funds are also offering a massive supply of capital (both levered and unlevered). These unregulated lenders have plenty of competition for “light” and “heavy” bridge reposition loans from $5,000,000 to over $100,000,000, up to 80% of cost and beyond. Some are not shying away from heavy bridge or major renovation opportunities. Many are offering non-recourse money available for assets with zero cash flow going in. CMBS players seem to have decreased, relative to recent years, due to new regulations and lower profit margins. However, there is still plenty of healthy competition. Spreads are still very tight as bond buyers seem to like the “skin in the game” required by new risk retention rules. Rating agencies are closely watching hotel and retail underwriting during this cycle. New full leverage loans are being originated at rates as low as 210 to 220 over 10 year Swaps or all-in rates of about 4.50%. The “wall of maturities” featuring loosely underwritten loans originated back in 2007 (many with 10 years of IO) are often requiring new equity injections due to stricter underwriting standards. Mezzanine and Preferred Equity are offered by debt funds in form of secondary financing, in search of high yields, both for stabilized and transitional properties. stay tuned.    David R. Pascale, Jr. 

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    Treasuries Spike on Yellen Testimony and CPI

    Pascale’s Perspective

    February 15, 2017

    Janet Yellen’s first congressional testimony during the new administration was highly anticipated.  She defended regulations and Fed independence, as expected. She also dropped a minor bombshell when she said “waiting too long to remove accommodation would be unwise” and that the committee will evaluate employment and inflation against expectations to see whether “a further adjustment of the Federal funds rate would be appropriate.” In addition, a recent CPI report showed US consumer prices increased in January by 0.6% (markets expected 0.3%) making it the highest since February 2013. The 12 months ending in January showed an annual increase of 2.5%, the highest since March 2012 and well above the Fed’s stated target of 2.0% (note that the Fed’s preferred indicator, PCE, has not yet hit 2.0%, but this is a strong indication that it will soon). This is definitely a sign that inflation is firming up, both including and excluding energy costs. The 10 year Treasury yield crossed above 2.50%, which could be a key technical level. Other wild cards: (1) Congress and the administration are set to roll back some or most of Dodd-Frank regulations in order to spur more bank lending, etc. This may reduce capital requirements for the money center banks. Much of the capital held by banks is in the form of Treasuries. This may trigger a major selloff.  (2) China:  The administration is singling out China for currency manipulation and trade practices. If sanctions and/or tariffs are invoked, China may retaliate by selling a good portion of the $1 trillion of US Treasuries it is holding. stay tuned.    David R. Pascale, Jr. 

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    Treasuries Rally on Fiscal Policy Uncertainty

    Pascale’s Perspective

    February 8, 2017

    The end of the 30-year bull market in bonds may not be as “over” as was predicted in recent months. The 10-year T yield dropped to 2.31% and is now at 2.34% (after hitting highs over 2.60% in mid-December 2016). Bearish short bets on Treasuries have also been reduced in recent weeks. The markets are still waiting to see the expected stimulative fiscal policy from Washington. Details and consensus are not emerging as quickly as anticipated. Euro jitters are back: France’s upcoming election may result in a “Frexit” (France leaving the European Union) that could result in the dissolution of the Euro. The Greece debt crisis is also back in the news: Another restructure or bailout required to avoid default, but the political climate in northern Europe countries is increasingly opposed to such aid. This, along with the CMBS rally and tight spreads from portfolio lenders (Fannie, Freddie, Life Companies, etc.), are keeping all-in rates in the 4.00-4.75% range for new 10-year full leverage loans for solid properties. As you can see from above transaction, sub 4.00% financing is available for some 7-year terms. stay tuned.       David R. Pascale, Jr.

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    Fed Holds Rates, Treasuries “Looking for Direction”, CMBS Rallies

    Pascale’s Perspective

    February 1, 2017

    Today’s Fed announcement to leave rates unchanged was expected. The Fed noted that consumer and business sentiment continues to improve, job gains remain solid, but wage inflation is not heating up. In addition, business investment remains soft. The Fed’s preferred inflation gauge, PCE, was released Monday, and it remains under the Fed’s 2.0% inflation target (1.7% annual increase). The Fed predicted “gradual” tightening and will most likely await the new administration’s fiscal policy, which is taking longer than anticipated to coalesce. Although the Fed indicated three rate increases for 2017, futures markets now expect two, most likely the first one coming in June at the earliest. CMBS: Maybe the dreaded Dodd-Frank imposed risk retention rules were not so bad? The year is starting with CMBS rallying as investors seem to love the “skin in the game.” Supply/demand dynamics are in play as buyers’ fresh allocations run into a slightly lower than usual January supply. So far, originators have been able to sell the illiquid risk retention portions of the securitization at approximately what the liquid portions were selling for pre-regulation. 10 year AAA bonds yields have plunged to about Swaps + 88 bps (down from about Swaps + 130 in October), with lower classes also rallying. These dynamics are allowing lenders to get aggressive. New full leverage 10 year loans for high quality properties are pricing as tight as Swaps + 210 or near 4.50%, with a majority of less prime deals still pricing sub 5.00%. stay tuned.   David R. Pascale, Jr. 

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    Inflation Hits Fed Target, More “Normalization” On The Way?

    Pascale’s Perspective

    January 18, 2017

    Today’s CPI numbers again demonstrate the link between oil prices and interest rates. Annual CPI hit 2.1%, which is just above the Fed’s stated “target” of 2.0%. Note that employment is already at the Fed target. The leading CPI category was gasoline at over 9.0%. Interestingly for real estate, housing costs were up 3.6%. The 10 year Treasury hit 2.43% today after the release, after dropping to 2.40% yesterday morning. Note that the Fed’s preferred inflation measure, PCE (Personal Consumption Expenditure) Index is at 1.4% as of November. But the CPI report definitely indicates an upward trend in prices. Let’s see if it’s sustained. A key component of the unprecedented and ultra-accommodative monetary policy from the Fed in the wake of the financial crisis has been quantitative easing via increasing the balance sheet. The Fed purchased about $80 billion of bonds per month during much of 2010-2013 which comprised of Treasuries and Mortgage Backed Securities. Although the bond buying stopped, the Fed is still holding those bonds and reinvesting the proceeds as they mature. Recent statements by Fed officials indicate that the Fed may be ready to start disinvesting (selling), by not reinvesting as bonds mature. This will lower the Fed’s balance sheet which also dovetails with stated policy goals of the incoming administration. One official indicated the right time would be when short term rates reach 1.0% or at the time of the next 0.25% increase in the Federal Funds Rate which has a potential to happen in June 2017. Again, the Fed is sending out trial balloons to avoid another “taper tantrum” when Bernanke abruptly announced the end of the purchase program and spooked markets. The effect of the increased supply on market and economy will be closely watched. It will be interesting to see when the “old normal” returns, i.e. short term rates near 3.0% and the Fed balance sheet back to its “normal” size of about $1 trillion (down from $4 trillion today). stay tuned.           David R. Pascale, Jr.