Yield Curve Flattening, Tight Spreads Keep All-In Coupons At Low

The long end of the curve is rallying with the 10 year Treasury hitting its second lowest level of 2017 at 2.198%.    The month of May saw an overall decline of 8.4 basis points.   A couple of factors are in play feeding the “contrarian” long end rally when recent economic reports seem to confirm the Fed’s stated intent to raise rates two more times this year (once “for sure” in mid-June, and then again in September or December.  Note that the second increase is most likely dependent on a “least messy” outcome of this summer’s debt ceiling increase drama in Washington.     An increase in short term rates may slow down the economy and hinder long term growth, especially if there is no major tax reform or infrastructure program enacted by Congress.   Again, all eyes are on Washington.   Long term bonds are dependent on inflation and growth expectations, so the yield curve may continue to flatten as the short end rises along with the Fed rate increases.   CMBS:  Meanwhile spreads are tightening for CMBS loans with the 10 year Swap nearing 2.00%.  All-in rates are again in the low 4’s for full leverage loans.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.