Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond

Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond Today’s 0.25% rate hike by the Federal Reserve has been anticipated for months and was no surprise. Note that this is the only rate hike for 2016, and the second in 10 years. Markets reacted to the Fed’s accompanying statement predicting 3 hikes in 2017 (3 months ago, they predicted only 2). Could this be due to a more inflationary outlook post-election? The Fed is seeing some tightening in labor markets, with regional Fed reports indicating labor shortages in some districts. The Fed also raised their long term interest rate outlook, whereby it predicts the “stabilized” interest rate in 4 years. In 2012, this predicted rate was 4.25% and the Fed has been lowering this projection over the years; but today it raised it 0.25% to about 2.90%. This meeting has the Fed being seen in a new light as the economy is translating from central bank-centric monetary policy (gridlocked Washington) to highly anticipated fiscal policy (broad infrastructure initiatives and comprehensive tax reform). When’s the next increase? Futures markets are anticipating a June 2017 increase, giving Congress and the new Administration time to enact policy in the spring. The “big question” is can the economy still grow with the burden of higher interest rates after 8 years of tepid growth despite near zero interest rates, or can the “new normal” transition into anything resembling “normal”? stay tuned.     David R. Pascale, Jr.

George Smith Partners has placed permanent debt with a California Capital Provider funding from $10,000,000 to $48,000,000, priced from 3.85%. Fixed for 10 years on a non-recourse basis, all core assets in California major metropolitan cities are underwritten with a minimum of a 10% debt yield and smaller in-state markets with strong credit is considered.

Treasuries seemingly have found a new level with the 10 year yield hanging in the 2.40% range for the last few weeks. Economic data (construction spending, unemployment, productivity, factory orders) has been bullish, giving the Fed “clear sailing” for next week’s rate increase. Last week’s employment report headline of 4.6% was tempered by a low Market consensus is a 0.25% increase. The closely watched elements will be the accompanying statement, the “dot plot” and Fed Chair’s press conference for the pace of future increases in 2017/2018. stay tuned

David R Pascale, Jr.

George Smith Partners is placing non-recourse ground-up construction mezzanine debt, preferred equity and senior debt through a national portfolio lender funding from $3,000,000 to $50,000,000. Capital Provider offers flexible loan structures with terms between 1 year to 10 years and fixed or floating rate. Pricing starts from 12% with no restrictions on asset types or location nationwide for high leverage transactions to 90% of cost. In addition to the ground-up, bridge and permanent loans, programs also include a line of credit for qualified traditional or DST Borrowers.

Early this week, Treasury yields seemed to “crest” as the 10 year hit just over 2.40% and then rallied to 2.31%. Note that the 10 year T was at its all time low of 1.32% in early July. With the stock market hitting all time highs, the long anticipated “great rotation” out of bonds into equities seems to be finally upon us. Markets are reacting to the anticipated return of actual fiscal policy after years of gridlock in Washington and the economy depending mostly on monetary policy from the Fed. But the big swings are all based on assumptions of policies that will not be in place until March 2017 at the earliest. The past few weeks have seen the markets react to a string of positive economic reports: Q3 GDP revised to 3.2%, consumer confidence much higher than expected, and today’s surprising OPEC agreement (which sent oil prices higher, always a harbinger of inflation). This Friday’s unemployment report will be closely watched. stay tuned.     David R Pascale, Jr.

National bridge provider will fund $5,000,000 to $35,000,000 of reposition debt sized to a HUD permanent loan to 90% of cost. Our capital provider provides debt on various healthcare assets including: senior housing, assisted living, medical office and skilled nursing. With the ability to fund a zero cash flow conversion at close, this program targets a HUD loan exit. Bridge transactions are priced from L +400 for a 2 to 5 year term. Loan servicing and process management is conducted internally, granting efficiency during the asset rehabilitation.

The rise in bond yields post US Election has been international. Japan’s 10 year is actually in positive yield territory. Italy’s 50 year bond has lost 16% of its value in 3 weeks. The 10 year T went from 1.71% on election night to a high of 2.30% this morning, with daily yield increases. All of this was based on speculation of President-elect Trump’s fiscal policies (infrastructure and military spending combined with tax breaks). Today, investors looked at actual data (persistently low oil prices, new economic reports showing flat wholesale prices and tepid industrial production). Bonds may be “oversold” and yields are attracting buyers. Fiscal policies still have to be approved by a Republican Congress that includes its share of “deficit hawks”. Today’s 10 year T closed at 2.22%. The next few weeks should be interesting as investors digest data and clues to next year’s policies. stay tuned.     David R. Pascale, Jr.

George Smith Partners identified an institutional capital provider funding subordinate debt behind existing CMBS, Bank and Life Insurance Company debt. Financing is employed through methods including; transfer of interest, buying out an LP, investing in the LP, inserting a new LLC through an assumption. The sub-debt lender will fund fully stabilized assets up to 75% of cost/value with various pay structures. Terms are coterminous with the senior or may be pre-paid. Pricing starts at 8% for a current pay and requires accrual or equity participation. All structures are within full compliance of the existing senior debt.

Last night and this morning were a fascinating study in market psychology. First off; the markets had priced in a Clinton victory after Sunday’s “all clear” announcement from the FBI. Treasuries sold off on Monday and Tuesday (Election Day) and equities rallied. Then came the election results and markets began to roil worldwide, Brexit style: huge selloffs in Asian markets, Dow Jones futures were down 800 points, and safe havens such as US Treasuries and gold rallied. Then Trump’s acceptance speech included conciliatory language, toned down rhetoric, calls for unification, and fiscal policy: infrastructure investment, corporate tax reform. This calmed and rallied equity markets. The 10 year Treasury, which dropped to 1.71% on the initial “flight to quality” later sold off and the yield hit 2.06% before settling at 2.02%. Why? (1) Trump is promising infrastructure and military spending while cutting taxes. This will increase deficits and the supply of Treasuries, (2) As volatility lessened, the Fed is more likely to raise rates at the December meeting, (3) Several spots on the Fed’s Open Market Committee are coming up for nomination and Trump is expected to nominate more “hawkish” members. stay tuned.     David R. Pascale, Jr.

George Smith Partners is placing ground-up construction debt with a portfolio capital provider on a national basis. Requests from $20,000,000 to $100,000,000 are priced from LIBOR+375 to 80% of as-complete value for multifamily assets. Light bridge/reposition transactions will be considered under these same constraints. The same capital provider also has the ability to supplement subordinate capital structured as mezzanine or preferred equity, sized to 75% of value from $10,000,000 to $50,000,000. For construction and bridge subordinate capital, pricing floats from 12% up to 5 year terms. Class A/B core and special use assets in primary and secondary markets are considered.

Note to our readers: This column is not an endorsement of any candidate but is meant to discuss the possible capital market reactions to the post-election outcome.

As Expected, today’s Fed meeting did not produce a rate hike (although 2 members voted to raise). This was expected as the meeting comes days before a national election and there was no press conference scheduled. However, the Fed used “Fed speak” to say “we’re hiking rates next month – count on it”. The 3rd quarter GDP growth of 2.9% annualized and the seemingly stabilized 5% unemployment rate has given the Fed confidence that their policies have had their intended effect. The final piece of the puzzle is inflation, which is finally picking up. The Fed’s favorite gauge, Personal Consumption Expenditures, showed an annualized core rate of 1.7% last month. Another closely watched index, expected price increases, hit its highest level in more than a year. The December meeting is the Fed’s last chance to raise rates in 2016 (remember they predicted about 4 rate increases for 2016 at the end of 2015!). Futures markets are pricing in a 75% chance of a December increase. Election: Markets like certainty, continuity and a divided government (ie President and Congress from two different parties). Until last week’s bombshell FBI announcement, it looked like a likely Democratic President and Republican Congress with the Senate a toss-up. A potential Trump victory has markets nervous as it may be a Brexit like moment. It may cause Fed Chair Yellen to resign as that result may be seen as a negative referendum on Fed policy. Markets also could react negatively to a close, highly contested result like 2000 that drags into December. Treasuries (along with Munis and other ultra safe investments) may rally with yields dropping on a flight to quality. Credit spreads could widen as stocks and riskier instruments drop in price. This may cause the Fed to postpone the expected December rate increase. Look for markets to remain on edge until this uncertainty has been resolved somehow. Stay tuned.   David R. Pascale, Jr.

George Smith Partners identified a real estate revolver lending program through a Western States Capital Provider funding from $5,000,000 to $20,000,000. Pricing ranges from LIBOR+500 to 700 for a 12 month term to 75% of capitalization; to 80% by exception. This non-recourse credit facility is collateralized with a 1st Trust Deed during the life of the interest only term. In addition to certainty of financing and pricing, Lender provides expedited funding within 7 to 14 days of application.