Don't Miss a Fact,
Sign Up for FINfacts!

FINfacts is a weekly newsletter highlighting recent financings and economic insights.

Subscribe Here

GSP Insights

  • “Extreme” Yield Curve Inversion Signals Recessionary Expectations, Bond Yields Drop

    Pascale’s Perspective

    October 26, 2022

    The 2 Year Treasury and the 10 Year Treasury inverted in July and have remained “out of balance” to this day. That inversion is often seen as a harbinger of a recession. Today, the 3-Month Treasury is higher than the 10 Year Treasury – this has occurred only 7 times since 1967. Markets may be saying that the Fed has raised rates too fast, without allowing for enough lag time to gauge the effects (which can be felt for up to a year after any given rate hike). This week has seen earning disappointments from tech companies as companies pull back on advertising. The Case-Shiller index indicated home price gains are dropping at the fastest pace on record as mortgage payments average 75% higher than last year. The Fed’s demand destruction strategy is “working.” Recent quotes from Fed policy makers indicate some concern over raising rates too quickly over the next few months. Bonds have rallied – after hitting a multiyear high of 4.32% last Friday. The 10 Year is down to 4.00% as of tonight’s close. The latest hopes are quantified in the futures markets – a 75 basis point increase is nearly assured at next week’s Fed meeting (94% probability), but the December meeting futures show a 63% chance of a 50 basis point increase, and 37% at 75. This Friday’s PCE report looms large as the final major inflation data point before next week’s meeting. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • 10 Year Hits 4.15%, Highest Since July 2008

    Pascale’s Perspective

    October 20, 2022

    A perfect storm is continuing to hit treasury prices and therefore yields are rising. Markets study every data report hoping for some sign that inflationary pressures are easing/slowing/peaking, hoping for a “pivot” from the Fed. Recent economic data hasn’t provided that hope. The supply/demand metrics in the Treasury market are strained: record debt issuance and major buyers (Japan, China, Pension Funds) are buying less or sidelined. Also, most importantly, we are seeing heretofore untried Quantitative Tightening from The Fed. The central bank regularly purchased $80 billion per month during several extended periods since 2010, but is now selling Treasuries. The Fed was still purchasing Treasuries into March of this year. The process is now picking up as it took months for those recent purchases to “settle” – now the Fed is selling up to $95 billion per month. In fact, the Fed recently sold $37 billion in one week.

    “Bid to cover” ratios are dropping in recent auctions, indicating fading demand. There are signs that liquidity in the Treasury market itself is starting to dry up, causing the normally calm Treasury Secretary Yellen to recently comment on her concerns. Recent Data: Last week’s CPI report continued the recent narrative that price increases are pivoting from goods to services. This is more concerning to the Fed as labor is a critical component of services. Example: travel is especially inflationary due to pent up demand for leisure combined with the return of business travel/conventions. Airline ticket prices and bookings are skyrocketing and the industry estimates there is a shortage of about one million workers in the segment. Note that apparel and appliances are seeing price and demand declines. Many retailers are overstocked as supply chains loosen and demand softens. Fed Speeches: Neil Kashkari referenced CPI reports in comments this week. He indicated that perhaps “headline” CPI has peaked but he is more concerned about core inflation (excluding food and energy). He indicated the Fed was resolute in its determination and if core inflation lingers into next year, commenting “But if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5%, or 4.75%.” This caught markets attention – as the previously assumed “terminal rate” was about 4.25%-4.50%, and he’s talking about 5.0%. Fed Pivot Watch: Powell has made it very clear that the Fed is willing to tolerate unemployment and significant losses in stock markets without “blinking.” But recent developments like the British gilt crisis and Treasury market liquidity may be early indications of systematic financial risk which would (hopefully) be intolerable to the Fed. Stay tuned….

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Forward Purchase with 95% LTC Financing

    Hot Money

    October 19, 2022

    George Smith Partners is working closely with a capital provider who is actively seeking to grow their build-for-rent portfolio. The capital provider creates an agreement with the developer by entering into a fixed-price purchase contract at any point of the development and funding up to 95% of the total project cost. The interest is 100% accrued until they start purchasing finished homes at certificate of occupancy. They can also purchase all units at final certificate of occupancy. This capital provider has a footprint across the nation.

  • Check out Pascale’s Perspective on LinkedIn

    Pascale’s Perspective

    October 12, 2022

    David Pascale LinkedIn

  • A Tale of Two Demand Cycles

    Pascale’s Perspective

    October 6, 2022

    Is the Fed delivering the crushing demand shock that will stabilize prices and allow them to pause on the rate increases? The answers are “things are easing” for goods, and “not yet” for services. Last week’s PCE release indicated “core” inflation rose 0.3% monthly and 4.9% annually. Last month was 0% monthly and 4.7% annually. Markets reacted with a bond selloff, sending the 10 Year Treasury up to 3.83%. Spending on goods dropped 0.5% but spending on services jumped 0.8%. This could be seen as a “demand rotation” that will eventually result in an overall economic slowdown. This week’s reports continued the narrative: weak ISM manufacturing index: 50.9% (near contraction territory), construction spending down 0.7% month to month, and today’s ISM services index up to 56.7%.

    Today’s ADP report showed businesses added 208,000 jobs in September- surpassing the Dow’s estimation of 200,000 jobs. Note that goods producing industries (manufacturing, mining, natural resources) were down 29,000, but services (trade, transportation, utilities, business services) saw a gain of 147,000. The job increases aren’t necessarily inflationary, it’s the mismatch between open jobs and labor participation. That metric is easing – recent months saw a 2 to 1 ratio of open jobs for each unemployed American. That has dropped to 1.67 in September with increased labor participation and a drop in resignations. With the Fed having raised rates by 3.00% since March, it’s important to point out that the effects may be “lagging indicators.” There’s a case to be made for pausing rate increases to actually quantify the effects without going too far. From recent Fed speeches over the past few weeks, that isn’t happening. A 75 basis point increase in early November is basically a given, with speculation centering on the December and January meetings as slowing (25-50 basis points) or pausing. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fixed Rate Senior Bridge Financing Starting at UST + 3.00%

    Hot Money

    October 5, 2022

    GSP has identified a nationwide capital provider of fixed-rate senior bridge loans with a 2-year term. The program is intended for properties that are leasing up but need some additional runway before a perm loan can be put in place. Pricing starts at 2 Year UST + 3.00%, and the rate can be locked at application. Minimum interest is 12-15 months, after which the loan can be paid off without penalty. Since the loan is fixed, the borrower does not have to buy an expensive cap, which saves over 1% upfront in the current volatile interest rate environment.

  • Construction Financing Starting at SOFR + 300

    Hot Money

    September 28, 2022

    George Smith Partners has identified a capital provider that specializes in financing the construction of build-for-sale (BFS) and build-for-rent (BFR), single-family residential properties. The lender can fund non-recourse construction debt up to 75% LTC. With floating rates starting at SOFR + 300, they can fund loans from $5,000,000 to over $100,000,000. This capital provider lends nationwide and has recently been very active in western markets.

  • Bonds Rally Out of “Free Fall” On BOE Intervention

    Pascale’s Perspective

    September 28, 2022

    Bond yields spiked over the past week as global financial assets sold off. Stock markets here re-tested the June 2022 lows and the 10 Year Treasury jumped from 3.50% (at the time of the Fed meeting) up to 4.01% yesterday. A 4.0% 10 Year Treasury was last seen in mid-2008. The fear trade was in full effect as markets are getting the message that the “Fed Put” is off the table – the central bank will allow unemployment, market volatility, and higher unemployment in order to control rising prices.

    The announcement of large tax cuts in Britain created market turmoil as the already weakened British pound plummeted in value, rating agencies issued harsh downgrades and Gilt bond yields spiked. The Bank of England surprisingly intervened strongly, buying up as much government debt as necessary to restore stability. The BOE statement: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.” Bond markets worldwide rallied as one of the “Big 7” central banks, who often discuss policy covertly or overtly during crises, stepped up in a crisis. Maybe this sets a new higher standard for monetary or fiscal intervention (“In case of financial meltdown, please break glass, otherwise you’re on your own”). The 10 Year Treasury dropped from 4.01% to 3.69% today, the biggest drop since 2020. Interestingly, the 10 Year British Gilt bond yield spiked to 4.5% before dropping to 4.05% today, which is very close to where the US 10 Year started the day. This week’s big data release is Friday’s PCE. The monthly core rate will be very closely watched, and its elements parsed. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Raises 75 bps And Is Not Done

    Pascale’s Perspective

    September 21, 2022

    Today’s 75 basis point increase in the Fed Funds rate was well telegraphed and the vote was unanimous. Today’s increase to a target rate of 3.00% – 3.25%, the highest since 2008, is the beginning of a period of restrictive monetary policy. The previous rate of 2.25% – 2.50% was considered the “neutral” rate, neither accommodative nor restrictive. The increase wasn’t really news, but the projections for “how much higher?” and “how long?” are significant. The terminal rate (peak) was anticipated to be about 3.8% in June. Today, the Fed dot plot and commentary put that rate at 4.6%. Futures markets are predicting another 75 basis point increase at the next meeting (November 2), with another 50 bps expected in December. That will take it to about 4.3%, on its way to the 4.6% terminal rate. The Fed “dot plot” predictions indicate the rate will remain there throughout 2023 with rate cuts starting in 2024. Compare that to June: a 3.25% year-end rate followed by a few more increases to 3.8% and rate cuts starting in the 2nd half of 2023.

    In his remarks, Fed Chair Powell reiterated his concern that employment metrics are “out of balance” and contributing to inflation in an unprecedented manner. See the chart below, job openings are twice the amount of unemployed people. That ratio used to be about 1:2 pre-pandemic. Labor participation has taken a hit due to unprecedented social and behavioral changes in recent years. It will be difficult to tame inflation as long as this imbalance persists. Therefore, Powell is watching quits and upticks in labor participation very closely.

    The Fed is abandoning its dual mandate, price stability, and full employment, in order to bring inflation under control. Jobs will be sacrificed on the altar of price stability. Quotes from today: “The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer,” and if there was any doubt, “Price stability is the responsibility of the Fed and serves as the bedrock of our economy… We think a failure to restore price stability would mean far greater pain (than higher unemployment)”. Rate increases are quite effective at driving down demand for big-ticket items (houses, cars, etc). The increases so far have put the 30-year fixed rate mortgage at 6.25% (January 1 it was 3.0%) and has contributed to the biggest drop in home sales since 2015. There are other signs that the economy is slowing down – possible “leading indicators” like FedEx’s dramatic drop in volume and dire outlook for next year, California’s drop in projected tax revenues, pauses in hiring from the once soaring tech sector, etc. 30-Day term SOFR is 3.08%, the 10 Year Treasury is at 3.56%, the highest since October 2008. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Participating Construction & Value Add Programs up to 90% LTC

    Hot Money

    September 21, 2022

    George Smith Partners is working with multiple capital providers offering high leverage participating loans for ground up construction and value add deals up to 90% LTC. Rates are 4.25%-6.5% fixed during the life of the loan with an IRR lookback to the lender and then lender receives between 15% and 50% of the profits from operations and the exit. Recourse with burn off and non-recourse options available. Most major cash flow-generating property types are considered.

  • Hot CPI Report Stokes Fears of “Entrenched” Inflation

    Pascale’s Perspective

    September 14, 2022

    Yesterday’s CPI report was expected to show moderating price increases led by falling energy prices. Instead, the 0.6% monthly increase in core prices took markets by surprise, with stock markets dropping dramatically, erasing recent rallies – which were largely based on softening inflation hopes. Price increases are broad-based – shelter costs, health care, restaurants, and travel are all experiencing high demand from a consumer base that has experienced a 6.7% increase in wages over the past year (that figure is the highest in 40 years). The narrative is changing: falling gas prices, improving supply chains, and lower shipping costs were expected to lead to lower prices. That’s not happening as relentless consumer demand keeps driving prices up. This is hardening expectations that the Fed will have to increase rates higher and longer to accomplish its desire to stifle demand. This was the last major piece of data before next week’s Fed meeting. The futures market is now pricing a 25% chance of a 100 basis point increase in the Fed Funds rate at next week’s meeting. The 10-Year Treasury spiked from 3.29% to as high as 3.46% yesterday, closing at 3.41% today. Piling on: A possible Railroad strike could massively disrupt supply chains as negotiations drag on towards a Friday deadline. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • 5 Year CMBS Financing Starting at SOFR Swap + 275

    Hot Money

    September 14, 2022

    George Smith Partners has identified a CMBS lender sourcing loans for an $800M pool made up of only 5-year term loans. Pricing for the 5 Year financing begins at Swap +275 for 50-60% LTV.  This is 50 – 75 basis points lower than typical 5-year pricing. This capital provider can also structure the 5th year to be open to prepay for a low spread premium. This program is ideal for borrowers looking for a non-recourse fixed rate option with the ability to refinance or sell in 4-5 years with no prepayment penalty.