Pascale’s Perspective

  • Markets Reel on Coronavirus (COVID19), Crying Out for Fiscal Policy

    Pascale’s Perspective

    March 11, 2020

    Stocks, bonds, and credit markets are at peak volatility as the pandemic spreads worldwide.  Massive daily fluctuations have become the norm.  The economy may be in recession now according to many analysts.  The global economy may come to a near halt with increased unemployment, slowdowns in consumer spending and business investment.  Predictions are out the window as the spread of Coronavirus has surpassed precedents such as Ebola, SARS, MERS, etc.  The uncertainty is contributing to the volatility.  The classic “Fed put” whereby the Fed cuts rates and soothes markets is not going to cut it this time.  With treatments or vaccines most likely months or years away, markets are clamoring for the full arsenal of government tools: strong crisis level fiscal and monetary policy from the U.S., a coordinated maximum response.  England did their part yesterday, as the Bank of England cut rates and Parliament committed to fiscal stimulus. This was apparent with markets plummeting after a rare Fed non-meeting emergency rate cut.  Various stimulus plans are being discussed in Washington: President Trump speaks tonight, the House of Representatives is expected to pass a bill tomorrow and the Senate seems to be waiting for guidance.  The Fed is pulling out all the stops.  Meanwhile, next week’s meeting will almost certainly include a 0.50% to 0.75% rate cut (which will bring the Fed Funds rate back to near zero, where it sat from 2008 to 2015). They have increased overnight repo line assistance to a staggering $175 billion (note that a mere $50 billion was enough during last September’s volatility). Other tools could be deployed: a full on return to QE with the Fed buying Treasuries and Mortgage backed securities.  Treasuries: the 10 year hit an all time low of about 0.38% a few days ago.  Today it closed at 0.84%.  The yield increase usually means things are settling down, but in this case it’s “bad”.  Banks are selling Treasuries in order to hoard cash.  Lending: We are hearing the gamut of reactions.  Some lenders are shutting down originations temporarily, some fixed rate lenders are increasingly indicating an all in rate rather than a index and spread. Underwriting standards are being scaled back.  Anticipated slowdowns in consumer spending and business investment will have consequences for real estate. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Is All In – well, almost – Lenders Struggle to Quantify and Price Risk as Indices Drop to Unprecedented Levels

    Pascale’s Perspective

    March 4, 2020

    Yesterday’s emergency 0.5% rate cut by the Fed was both expected and surprising. The cut was expected and it seemed sudden in its timing. Equity markets plummeted in a “buy the rumor, sell the news” scenario aka “we want the Fed to cut rates, oh my gosh, the Fed cut rates, things must be worse than we thought!” Also, investors remembered that the Fed does not have a vaccine, they cannot solve coronavirus with monetary policy! Since 1998, the Fed has announced emergency (non meeting) rate cuts 8 times (Russian debt crisis 1998, crash 2001, 9/11 2001, and during the financial crisis). Prime Rate is now 4.25%, 30 day LIBOR is 1.38, and the 30 year is 1.67%. LIBOR is expected to go to about 1.15% soon. The 10 year T hit an all time low of 0.92% yesterday. This prompted some banks to issue research papers asking, “could U.S. T rates go negative?” Capital Markets: The Agency lenders instituted floors, Fannie Mae floored the 10 year T at 1.30%, then floored again at 1.10%. 10 year agency loans are being priced at about 3.40-3.60% all in. CMBS: As one originator said, “We are in uncharted territory, everyone is watching everyone else.” Spreads for full leverage loans are anywhere from 220-275. All-in coupons 3.25-3.75%, although some low leverage loans are being quoted sub 3.00% all-in. Another originator commented, “Volatility is high, but I am quoting some all time low coupons.” Hotel loans are being closely scrutinized due to the concerns about the impact on coronavirus on travel. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Bond Yields at All Time Lows on Worldwide Flight to Safety

    Pascale’s Perspective

    February 26, 2020

    The coronavirus is causing massive market volatility as the appetite for risky assets is plummeting. The 10 year T is at an all time low closing today at 1.32%. The 30 year is at 1.80%. This is in comparison to 30 day LIBOR at 1.61% (29.9 years of “curve” is 19 bps). This shows a market that is anticipating very low economic growth and inflation for the near future. The market may or may not be overreacting.  The absence of hard data and rampant speculation compounds to create massive uncertainty. The coming months will be telltale as the effects start to be measured in hard data and the spread rate becomes more apparent. We are seeing lenders institute fixed rate floors as risk spreads often widen with indexes plummeting. Some macroeconomic trends to be aware of are: (1) Coronavirus will have an immediate effect on the hospitality sector; (2) The 2020 Tokyo Olympics may be cancelled at a cost of $25B if there is no containment by May; (3) The Chinese economy is slowing and Q1 results of U.S. companies doing business in China will be affected; (4) 2020 GDP growth is expected to be 2.0%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Bond Market Does Not Blink at Inflation, What is Wrong?

    Pascale’s Perspective

    February 19, 2020

    For many years, inflation has been the “boy who cried wolf”, sometimes glimpsed, but never fully materializing. Bond markets have been sensitive to inflationary data, often selling off when CPI, PPI or PCE data comes in “hotter” than expected. Today’s Producer Price Index was expected to rise 0.1% in January, instead it jumped 0.5%. Did the bond market sell off and yields jump 5-10 bps? No. The bond market brushed off the news and instead focused on Fed comments warning of uncertainty due to coronavirus. Now that China/U.S. trade tensions have eased (and China is engaging in massive stimulus), global growth was expected to soar in 2020. It seems we have traded one uncertainty for a more nebulous and unknown danger. 10 year Treasury yield rose 1 bsp to 1.56%.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Spike and Equities Rally on Old Data

    Pascale’s Perspective

    February 5, 2020

    Last Friday the 10 year closed at 1.50% just 14 bps above its all time low, as coronavirus fears spurred a flight to safety. This week’s upbeat data turned things around as “risk-on” returned. The ADP employment report was significantly more bullish than expected. Note that the manufacturing sector has been lagging in recent months while employment and consumer metrics have been bullish. After Monday’s ISM Manufacturing Index report and yesterday’s Factory Orders report exceeded expectations, markets really took off. The 10 year T jumped to 1.65%. Various unconfirmed reports of potential treatments emerging for the coronavirus added to the rally. However, note that these reports are based on pre-virus data and Asian supply chains are critical to that sector. So there is some caution as the effects and scope of the virus is yet to be quantified. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Holds Steady As Yields Dive on Virus Fears

    Pascale’s Perspective

    January 29, 2020

    During today’s Fed statement and subsequent comments by Fed Chair Powell there was an expressed concern about the “uncertainties” involving the spread of the Coronavirus. Treasury yields dropped and the yield curve is nearly inverted. The 10 year T is at 1.58%, the lowest in months and just 22 bps above its all time low. With the 3 month at 1.55%, another inversion may be at hand. The Fed also indicated concern about inflation and is very concerned that the U.S. does not become another Japan (ultra low rates and growth for decades with no room to cut rates and stimulate). The statement stressed that the 2.0% “symmetrical inflation target” was not a goal to be “near” but needed to be “reached”. Powell noted that the recent PCE of 1.5% was way too low and many Fed board members have indicated a willingness to let inflation go above 2.0% without raising rates quickly, possibly letting inflation “run for a while” hopefully in conjunction with strong growth. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • China Trade Deal Signed, But Uncertainty Remains

    Pascale’s Perspective

    January 15, 2020

    After two years of uncertainty that roiled stock and bond markets, the Phase 1 trade deal has been signed. Now the details are being parsed. Market reaction is basically a “relief rally” as the week to week uncertainty and tensions between U.S. and China have lessened. However, tariffs will remain in place subject to a Phase 2 agreement after the November election. The initial agreement mostly requires China to buy U.S. goods and services (some uncertainty remains whether China can perform on those purchases). This should remove a source of market volatility in 2020 and should be favorable for credit spreads. Treasuries and equity markets rallied with the 10 year Treasury closing at 1.78%. The first CPI and PPI reports of 2020 indicate (surprise) extremely low inflation pressures. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • New Year’s Then and Now, Steeper is Better?

    Pascale’s Perspective

    January 8, 2020

    Today’s yield curve is striking for it’s “normality”, ie. it is uninverted and fairly steep. One year ago today, the 2, 5 and 10 year treasury yields were bunched together, all within about 10 bps (2.55%, 2.58% 2.67%). The yield curve then inverted in August as the 10 year dipped below the 2 year yield. Today’s yield curve (1.57%, 1.65%, 1.87%) indicates confidence in the economy (high 10 year yield) and in the Fed’s promise to stand pat with no rate increase this year (lower 2 year yield). So 2020 begins with lower rates and a healthier curve. With low delinquency rates, an active secondary market, large allocations from portfolio lenders, and overall solid fundamentals, 2020 looks like another big year for commercial mortgage loan volume. For example, the Mortgage Bankers Association predicts an all time high in multifamily lending in 2020. Commercial activity is also predicted to be strong, with the notable exception that lenders are cautious on retail. As the economic recovery goes into year 11, it’s noteworthy that markets basically shrugged off potential escalation of conflict in the mid-East and uncertainty about U.S. China trade resolution.  Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Domestic and Global Developments Fuel “Melt Up” In Treasury Yields

    Pascale’s Perspective

    December 18, 2019

    Behind the impeachment drama, our divided government has been getting things done: new trade agreement with Mexico and Canada, major spending bills (with major deficit spending), an outline of a trade deal with China (some are calling it more of a “trade truce” with the heavy lifting set for next year). The Fed is doing their part by injecting liquidity into the short term markets almost daily, but don’t call it QE. All of these factors along with some positive economic news from Europe and hopes that next year’s Brexit will be orderly have buoyed the 2020 global growth outlook. Treasuries are selling on the sentiment with the 10 year hitting 1.92% today, the highest since July. Maybe those prognosticators that picked a 2.00% 10 year T at year end are pretty close. The rising treasury and relatively stable LIBOR index could return us to a more “normal” index relationship: a steeper yield curve and a 10 year T getting separation from 30 day LIBOR (as the Fed has indicated no rate increases in 2020). So floating loan rates should again be “cheaper” than perm rates. The good economic fundamentals should keep loan spreads tight. In a few weeks, the securitized lenders (CMBS, CLO, etc) will be ready to issue new paper to bond buyers flush with new allocations for the new year. Portfolio lenders will have to compete as the securitized markets often set the bar on spreads.

    Signing off for 2019. It’s been a pleasure writing this column for you and I look forward to an exiting new decade.

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

  • Fed Accepting “New Normal”, Takes Rate Increases Off the Table for 2020

    Pascale’s Perspective

    December 11, 2019

    Today’s Fed statement and remarks by Fed Chair Powell reflected a continuing change in the relationship between interest rates, economic stimulus, employment and inflation. 2019 resulted in three rate cuts (“mid-cycle adjustments”) which helped spur record stock market highs and low employment. Last week’s Jobs Report was a blockbuster even after accounting for the end of the GM strike. As those increases were implemented, many of the Fed participants indicated expectations of increased inflation this year as employment rose. The theory that full employment will result in inflation has been a bedrock of economic theory for decades. With unemployment at 3.5% and the PCE index at 1.6%, the theory is being tested and failing. By signaling no rate increases for 2020, the central bank is basically daring inflation to return. Many are concerned by polling indicating that public expectations of inflation are at historic lows. Which means that market participants are expecting low inflation and that may create a “self-fulfilling prophecy”. This week’s sad passing of legendary Fed Chair Paul Volcker brought back memories of the Fed’s most significant inflation battle. With inflation running at 12%, Volcker increased the prime rate to 22%, stopping inflation and causing significant pain as unemployment rose. Long memories of the early 1980s move markets to this day as treasuries sell off if inflationary news is in the headlines. The Fed feels that they have reached the “neutral rate” and it’s time to watch the effects. Stay tuned.

  • Data, Headlines and Rumors Move Markets in Volatile Holiday Month

    Pascale’s Perspective

    December 4, 2019

    Treasuries will react to the following factors: (1) Economic reports this week: Factory orders on Thursday (manufacturing has been shaky in recent months as the economy is being carried by the ever spending consumer); The unemployment report this Friday, December 6 (watch the wage trends) and December 15 (China/US tariffs are set to go into effect unless the parties reach some type of agreement or an agreement to possibly agree later). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Stay Positive” and Other Clues in the Fed Notes

    Pascale’s Perspective

    November 20, 2019

    Lot’s of talk (and tweets) lately about “going negative”, that the U.S. should consider negative interest rates just like Japan and Germany.  Today’s notes from last month’s Fed meeting indicated that the “benefits of negative rates abroad are mixed” and would create “significant complexity or distortions to the financial system”.  However, other esoteric tools for stimulus may be considered, such as a form of quantitative easing called “yield curve control” whereby the Fed sets an upper limit for short term treasury securities by purchasing enough of them to “cap” the yield.  This would be another large commitment to expanding the balance sheet as these purchases could be massive.  Speaking of the yield curve, the 10 year T is again dropping, today at 1.71% after hitting 1.95 11 days ago.  Negative news on the possible US China trade deal, now complicated by Hong Kong unrest.  Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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