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

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.