Powell, Germany, Inflation Keep Treasuries in Tight Range, CMBS Rally Continues

As investors continue to analyze the new Fed chair nominee, the “Powell trade” is a key factor keeping yields below recent highs. Also, the ECB’ s recent announcement that it is tapering purchases is being seen as dovish as Chairman Draghi indicated that the planned end date of September 2018 is a “target” and may be extended. This is keeping German bond yields low (10 year at 0.33%, after hitting a high of 0.60% over the summer). Treasuries are benefiting from a “relative value” trade as the spread between the Bund and Treasury narrowed this week. Finally, the stubborn low inflation numbers continue to confound economic theory as employment numbers heat up without a corresponding rise in prices and wages. For now, the market seems to be ignoring the consequences of the proposed tax cut in Washington. CMBS: Spreads keep tightening as the rally continues. 10 year AAA bonds priced at Swaps + 76 last week are down about 7 bps from the previous week. The best in the 2.0 era (post crash) was about Swap + 70 in 2014. (Note that the 1.0 low was about Swap + 30 in late 2006). Many full leverage loans are pricing in “the low 4’s” again. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners