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Pascale’s Perspective

  • Treasuries and Libor Futures Rise on Inflation Expectations

    Pascale’s Perspective

    February 24, 2021

    The 10 year Treasury hit a pandemic era high of 1.41% yesterday before settling today 1.38%. Fed Chair Powell’s congresional testimony yesterday and today assured the market that highly accomadative policy will contine. Any changes will be gradual and telegraphed well in advance. He made it clear that the Fed’s main concern is unemployment and not rising prices. The current Fed policy regarding monthly asset purchases and zero rates will not be affected until full employment (defined as a 4% unemployment rate) is achieved. The Fed is willing to tolerate inflation above 2% for a whille in order to acomplish their employment goals. As of now, despite warning signs the Fed’s preferred inflation idicator, the PCE (Personal Consumption Expenditures) has yet to hit 2%. The PCE release next week will be closely watched. Stay tuned.

  • Rates Moving Up, Is Anticipated Inflation to Blame?

    Pascale’s Perspective

    February 17, 2021

    The bond market is experiencing its “worst” January/February performance in years. The 10 year Treasury yield started 2021 at 0.91% and hit 1.30% this week and is now at 1.28%. The next critical level would be at about 1.50-1.60%. That was the last “normal” level before the March pandemic market disruption. Of course we are not “back to normal” yet. But lower levels of new Covid cases and hospitalizations combined with vaccine distribution is cause for optimism (nearly 20% of the US adult population has received at least one dose). Bond markets are historically “forward looking” as buyers are anticipating economic conditions down the road. The recovery is expected to unleash pent up demand for goods and services. Goldman Sachs increased their US GDP forecasts for 2021 and 2022 to 6.8% and 4.5% respectively, an increase of 0.2%. This week saw spikes in oil (hitting $60 per barrel, a pandemic high) and industrial metals led by copper and tin (now at multiyear highs).

    The case against inflation: slack in the labor market stubbornly holding down wage inflation. Increasing wages is a major focus and goal of the Fed. Today’s minutes from the January Fed meeting indicate the Fed sees the economy as “far from” their goals. The minutes specifically target a “broad” labor market recovery and inflation of at least 2%. Neither of these goals will be accomplished in the near future. Until then, the zero percent interest rates and $120 billion of bond buying will continue. Goldman Sachs predicts the next rate hike by the Fed in the second half of 2024 and the Fed will start tapering asset purchases in early 2022.

    Focus on Self Storage: The CMBS rally continues with originators still quoting in the 2.80-3.25% range even with the uptick in Treasuries. The composition of recent pools shows a strong appetite for loans on self storage facilities, a strong performer during Covid. This appetite has spread throughout capital markets as bridge and construction lenders join in funding well located self storage facilities at tighter spreads. It’s a sponsor driven market as the specialty nature of the product type makes operator expertise critical. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith

  • Data Points Towards More Stimulus, Credit Spreads Tighten

    Pascale’s Perspective

    February 10, 2021

    As Congress closes in on another large stimulus package, the economic data gives policy makers incentive and “inflation cover”. Last week’s jobless claims and unemployment reports indicate stalling job creation and persistent unemployment, justifying the need for further stimulus. A debate has arisen as some influential economists are warning against too much stimulus that may lead to inflation later in the year. This leads to concerns that the Fed may put the brakes on the nascent recovery by raising rates. Today’s CPI data indicated a 1.4% annual increase. Much of the inflation was due to rising oil prices (as the OPEC producers remain united in their resolve to keep production low, for now). However, inflation may firm up in the middle of the year as continued vaccinations, stimulus and pent up demand spur consumer spending. Also, the annual CPI averages will shed last year’s deflationary months (March, April, May).

    CMBS Update: Huge demand for CMBS bonds (and corporates) are spurring a rally in fixed rate spreads. AAA 10 year bonds are trading at about Swap + 60 after hitting a high of Swap + 200 last year. Distressed loan volume seems to have peaked and is improving, even for hotels and retail. Originators are quoting tight spreads in the sub 200 range for lower leverage and/or larger well underwritten loans. 10 years of Interest Only is common at lower leverage for the right transactions. This rally and the tightening in corporate bonds is causing Life Companies to also tighten up. We are seeing rates from some life companies in the 2.50% range (but lower leverage than CMBS and limited or no interest only). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith

  • 2021 Lender Outlook “The Pendulum is Swinging”

    Pascale’s Perspective

    February 3, 2021

    Today, GSP kicked off our annual MBA meetings (via Zoom) with debt funds, banks, insurance companies, credit unions, CMBS originators, private equity funds and mortgage REITS. The message for 2021: lenders are flush with capital, 2021 real estate allocations are up, lots of capital chasing well underwritten transactions. After a year which included a near shutdown in capital markets for months and conservative underwriting, many lenders are taking an aggressive posture this year.

    Vaccinations, a hope for the return to normal life, additional stimulus and continued Fed policy contribute to the optimism in the capital markets. Trends include: Life companies diversifying as they add debt fund originations to their core lending programs. Some are considering uncovered ground up construction loans in addition to the traditional construction perm combos.  Senior lenders allowing/encouraging sub debt to create high LTC capital stacks, banks ramping up construction programs shut down for much of 2020, more non traditional construction lenders, retail and hotel loans being considered (at the right leverage with a good story), floating rates dropping due to increased competition which is pushing originators to be more aggressive on LIBOR floors and tighter spreads. Bridge to bridge lending is available for properties needing more time/money to stabilize as Covid slowed down reposition timelines. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith

  • Low Rates, Staying For A While

    Pascale’s Perspective

    January 27, 2021

    Today’s Fed meeting was the first of eight for 2021. Fed Chair Powell set the tone for the year as he reiterated many of the 2020 issues that remain. Powell remarked, “We have not won this yet”, in reference to the economic recovery. He tamped down recent comments by Fed governors regarding a pullback in Fed bond purchases. He spoke about the $120 billion in monthly bond purchases that will continue until “substantial further progress” is made on both employment and inflation. The Fed is more concerned about job market weaknesses and less concerned about inflation. The message is that any changes in policy will be telegraphed months in advance and a reappearance of inflation would be allowed to “run” for a while before any policy changes. This should forestall any chances of a 2013 style “taper tantrum” where long term rates spiked quickly in a sell off due to confusing messaging from then Fed Chair Bernanke. This policy combined with the potential of “yield curve control” should give comfort to commercial real estate borrowers that the bedrock index for financing, the 10 year T, is benefiting from the accommodative monetary policy. The 10 year T closed today at 1.02%, after hitting a high of 1.15% earlier in January.

    What about spreads? CMBS, Agency and Life Companies are pricing 10 year loans in the 2.75% – 3.75% range generally as a variety of factors are helping spreads stay:
    (1) Overall economic recovery and the hoped for “return to more normal”;
    (2) Investor appetite for real estate based bonds: CMBS, Fannie, Freddie, (especially in the Covid era); and
    (3) Rising oil prices stabilizing the huge corporate bond market as energy companies are large issuers of debt.

    This calms volatility in overall credit spreads. Floating Rate: The healthier securitization market is creating more liquidity in the bridge loan market (usually via Collateralized Loan Obligations or CLOs). Well underwritten apartment bridge loans are being funded in the 4.00% all-in range or lower. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Focus on Washington

    Pascale’s Perspective

    January 20, 2021

    Incoming Treasury Secretary Janet Yellen’s confirmation hearings this week were illuminating. She urged Congress to pass another large stimulus package. She also endorsed a market-determined dollar value . This means the US will not weaken the dollar to create competitive trade advantage for US businesses. The continuing stimulus/deficit spending combined with ultra-accommodative Fed policies is expected to lower the dollar’s value against other currencies. This way the US can “naturally” allow the dollar to devalue while maintaining a position that allows us to point the finger at other nations that are engaging in overt currency weakening. With the Fed continuing to buy $120 billion in bonds per month and expanding its balance sheet up to $10 trillion, the flood of dollars is definitely contributing to asset inflation across the board (stocks, bonds, real estate, etc). Meanwhile consumer inflation remains low, allowing for loose fiscal and monetary policy. The threat to this policy is runaway inflation, which could force rates higher, threatening asset valuations. However, commercial real estate could then return to it’s status as an inflation hedge. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • 2021 Outlook….Near Term Challenges, Long Term Optimism and Hope

    Pascale’s Perspective

    January 13, 2021

    2020 was a year like no other and 2021 is starting out with turmoil and change. Let’s look at some trends to watch in 2021.

    Covid and the return to “normal”: The U.S. is experiencing record spikes in cases, hospitalizations and deaths while the pace of vaccination has been slower than expected. In the U.S., over 10 million people have received at least one dose, about 3.3% of the population.

    Optimism: New policies, wider distribution (mass vaccination centers, availability at pharmacies, etc.), and the expected approval of more vaccines should increase the pace. Estimates of normalcy range from Memorial Day to Labor Day.

    Fiscal Policy/Inflation Outlook: Look for further stimulus as the recovery has been bumpy and uneven. The Fed estimates that the unemployment rate amongst the lowest paid workers is over 20%. The results of the Georgia runoff elections resulted in Democratic control of the Senate. Combined with recent economic data indicating that job growth stalled in December, this greatly increases the likelihood and expected volume of further stimulus from Washington. More stimulus = more dollars, more treasuries, and economic growth. Also, oil prices are over $50 a barrel, the highest since last February as major producers are limiting output. As normalcy returns, pent up demand for travel and other economic activities are expected to push prices up further. Could we see the return of “classic” inflation for the first time in over a decade? Will the Fed allow the economy to “run hot” in excess of its 2.00% target without raising rates? Will investors once again view commercial real estate as an “inflation hedge”, again?

    Interest Rates: Due to ultra accommodative Fed policy, 2020 saw borrowers taking advantage of all time low fixed rate financings from Fannie/Freddie, CMBS, Life Companies and Banks. Rates in the 3.00% range for full leverage loans (with some IO) were available for the right properties (typically apartments, industrial, self-storage and selected office). 2021 is starting out with a jump in Treasury yields as the 10 year spiked from 0.84% to 1.15% in three weeks, before settling at 1.09%. The anticipated recovery should result in a steeper yield curve. Already, hedge funds are engaged in the “steepening trade” – buying short term treasuries and selling long term. Residential mortgage applications jumped 20% last week as borrowers rush to lock in low rates. Will commercial real estate borrowers and buyers join them? Will the Fed step in with “yield curve control” and buy longer term treasuries to keep those rates in check? Or, will the Fed turn hawkish, “declare victory” and ease up on bond purchases, allowing rates to rise?

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



  • 10 Year T Breaks 1.00% Level on Stimulus, Inflation Expectations

    Pascale’s Perspective

    January 6, 2021

    A sell-off in treasuries today spiked the yield on the 10 year Treasury to 1.03%, the highest level since the March 2020 Covid meltdown. After the Georgia run off results became apparent, expectations are for more stimulus, further expansion of the Fed balance sheet, and (possibly) inflation. After hitting 1.00%, the next key levels are in the 1.25% to 1.50% range. The most recent “normal” treasury levels from late 2019 (pre-Covid) were about 1.75%. US Dollar value indices are dropping as the supply of our currency increases significantly each month. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fiscal and Monetary Policy in Focus, Fed Meets While Stimulus Negotiations Grind On

    Pascale’s Perspective

    December 16, 2020

    Today’s Fed meeting and policy announcements showed the central bank committed to years of low rates and continued bond purchases with little fear of inflation. Markets were focused on the bond purchases and many were hoping for guidance indicating the purchase of longer term treasury bonds. The Fed’s $120 million of monthly bond purchases will continue as they “foster smooth market functioning and accommodative financial conditions, supporting the flow of credit”. A move to buying more longer term bonds (10 and 30 years) would alleviate fears that stimulus and deficit spending would lead to long term yields rising. No such announcement was made and the 10 year T is at 0.92%. The Fed balance sheet sits at $7.3 trillion and total US outstanding debt is $27.5 trillion. Note that at the end of 2007, the Fed balance sheet was at less than $1 trillion and US debt was $9 trillion. Supply/demand concerns are warranted. Meanwhile, Congressional negotiators are optimistic that they are on the verge of passing a $1.4 trillion spending bill for next year and about $900 billion in long awaited stimulus.

    With vaccinations beginning this week in the US, there is cause for optimism, but it’s pretty certain that the next three months will be extremely challenging for public health and the economy. Both sides of the aisle agree: the stimulus bill is a “must pass” before this Congress adjourns. There is talk of a weekend session and possibly negotiating into next week with another one week stopgap being passed by Friday.

    This is the final Finfacts of 2020, a year that has seen many challenges. I hope everyone has a safe and happy holiday season and best wishes for 2021. Stay tuned.

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

  • Critical Negotiations Sputter Here and There, Vaccine Anticipation Contrasts With Today’s Reality

    Pascale’s Perspective

    December 9, 2020

    Treasury yields dropped slightly and stock market rallies took a pause. Why? Critical negotiations on U.S. Covid relief in Washington and the UK/EU Brexit talks are both hitting stumbling blocks with deadlines for both looming this weekend. The 10 year T is at 0.93%. Last Friday’s November’s weaker than expected jobs report indicated a sputtering recovery with slowing job growth. The data combined with rising Covid caseloads/hospitalizations have added further urgency to Congressional and administration stimulus negotiations. It looks like they are kicking the can into next week with a 1 week government funding extension, creating a must pass date for next Friday, December 18. Congress will then recess for the year and a “no deal” would allow jobless benefits, student loan forgiveness, eviction moratoriums, Fed assistance programs and more to expire. The failure to act would also deprive the economy of badly needed stimulus.

    “V-Day” in the UK this week: vaccinations have begun! The world saw the Pfizer vaccine being administered to elderly citizens of the UK this week. The U.S. FDA is expected to approve the Pfizer vaccine this week and shots could begin in the U.S. next week. The UCLA Anderson School Economic Forecast, “A Gloomy Winter Followed by An Exuberant Spring” was released today. It predicts a robust “service recovery” led by healthcare, restaurants, recreation, travel and accommodation in 2021. Analysts have estimated that U.S. consumers have about $1.3 trillion in excess savings built up during the 2020 pandemic. As most consumer goods have been available for purchase with the boom in e-commerce, the thinking is that there is big pent up demand for travel, entertainment, live events, etc. This can’t come soon enough for the beleaguered hotel and retail sectors. A look at hotel loan maturities shows over $20 billion of hotel loans maturing in 2021 (as opposed to about $8 billion this year and an average of $7 billion for 2022-2029. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Vaccine Optimism, Covid Surge, Stimulus Endgame

    Pascale’s Perspective

    December 2, 2020

    Britain’s approval of the Pfizer vaccine means that shots will be given within days. The US is expected to approve vaccines by Pfizer by December 10 and Moderna by December 17, with shots being given by December 20. This optimism is tempered by record numbers of infections and hospitalizations nationwide going into winter. US officials indicate that 100 million Americans will be vaccinated by March 1, with over 70% of the population Congress is scheduled to adjourn for the year after December 11. The spikes in infections combined with the expiration of unemployment benefits and eviction moratoriums on December 31 is putting enormous pressure on Congress to finally pass another stimulus bill. Today, lots of optimism after months of failed attempts: a group of senators is circulating a $900 billion package that has bipartisan and bicameral support. Hopes are high but nothing is certain. The 10 year treasury hit 0.92% today. Stimulus and 2021 recovery hopes are contributing to the long term optimism. The Federal Reserve has indicated they will do everything in their toolbox to keep interest rates low. In order to assure low rates going into 2021, the Fed is expected to announce adjustments in their bond buying, which is now at $120 billion per month. The central bank is considering increasing their purchases of 10 year Treasuries, which will keep yields low going into 2021. Commercial real estate capital markets and borrowers will benefit from this policy. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields and Markets React to Long and Short Term Covid News

    Pascale’s Perspective

    November 18, 2020

    Last week it was Pfizer and this week its Moderna: more positive news about the availability for a Covid vaccine. Pfizer is expected to apply for approval for emergency use of their vaccine as soon as this Friday, vaccinations will start this year. This hugely positive news is in contrast to the situation today: spikes in infections, hospitalizations and possible restrictions going into the holidays. Today’s announcement that the NY school system is closing and switching to remote learning rattled markets. The 10 year Treasury yield that nearly hit 1.00% last week dropped to as low as 0.84% today. Yesterday’s weaker than expected retail sales numbers also contributed to the drop in yield. The urgency of a “final” stimulus bill that can act as a bridge to the wide distribution of a vaccine is becoming apparent. Several cliffs loom at year end: federal unemployment insurance, student loan payment freeze, mortgage forbearance and eviction moratoriums. The hope now is for the lame duck congress to pass stimulus as part of the efforts to continue funding the government beyond December 11. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners