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Pascale’s Perspective

  • Treasury Yields Drop As Markets Wait for CPI

    Economists are expecting tomorrow’s CPI report to show a 4.7% increase from a year earlier. Today saw the 10 year treasury yield drop to as low as 1.47%, possibly due to technical short covering in the markets. The big question is – will tomorrow’s big number rattle Treasuries into a sell-off? Or, will the number be tamer than anticipated? Last week’s weaker than expected jobs report calmed market inflation expectations. Tomorrow’s report may rekindle inflation fears.

    Spotlight on Hospitality: During the depths of the pandemic shutdowns in 2020, the hotel industry was hit hard, many hotels were closed for business or operating at severely reduced capacity. The monthly occupancy rate plunged from 62% in February to a multi-decade low of 22% in April. Many market participants were anticipating a wave of distressed property acquisition opportunities in the sector stemming from lender foreclosures. The “wave of distress” did not occur. The pandemic shutdown was vastly different from the credit crisis and Great Recession that began in 2008. This time, vaccine distribution and the 2021 reopening of society was within sight. Most lenders allowed their borrowers to hold on through the crisis. Case in point: the largest distressed portfolio in the US, the Eagle Hospitality Trust included 15 hotels located across the country. The distress in the portfolio stemmed from ownership issues then exacerbated by the pandemic. The auction is going better than anticipated with 5 assets fetching prices in excess of the stalking horse bids and the remaining assets expected to be sold this month. According to STR, May 2021 US Hotel occupancy hit 61.8%. Memorial Day weekend occupancy was nearly 80%. CMBS Hotel loans in special servicing dropped to a pandemic era low of 20.1%, after hitting a high of 26% last summer. Last month’s jobs report indicated that Leisure and Hospitality led the net increases in jobs at 331,000 new hires (#2, Government was at 48,000). Business travel is showing signs of life and even pent up demand. This week, the first major convention post pandemic, the World of Concrete in Las Vegas is well attended. Corporate travel is starting up amongst companies looking to get an edge on their competitors still doing business remotely. Here at GSP we are seeing more capital sources now considering hotel loans albeit at lower proceeds and higher risk spreads, but it’s a start. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As “Taper Talk” Gets Closer

    This week saw a parade of Fed officials simultaneously calming markets on one hand while preparing for the inevitable reduction in monthly bond purchases. Prices have risen across a broad spectrum of commodities: lumber, steel, copper, aluminum, gasoline, corn, chickens and entry level wages. The officials, including SF Fed President Mary Daly and Vice Chair Richard Clarida are sticking to the view that the recent inflation is transitory. Issues regarding supply chain and labor market bottlenecks need to work themselves out. The thinking is that we need to see sustained inflation with normally functioning supply chains until a true assessment can be made. Only then will the Fed start “removing the punch bowl” in a measured and well telegraphed process. For now, its working as the 10 year T dropped to as low as 1.55% this week after hitting 1.70% in early May. But note that one prominent Fed official is “tolling the bell” as he said, “It’s time to start talking about tapering bond purchases.” Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Shades of the Taper Tantrum?

    Today’s release of the April Fed meeting notes quoted officials saying that “if the economy continued to make rapid progress it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”. That’s Fed speak for, “we are thinking about it but don’t worry yet”. Remember, the Fed’s path is the following: prepare markets for reduced monthly bond purchases (now $120B a month), actually reduce bond purchases, then start raising rates. This release is significant as it’s the first hint. Markets didn’t fully throw a tantrum today. The 10 year jumped from 1.62% to 1.69% this afternoon, settling at 1.67%.

    Focus on Retail

    The pandemic upended the retail sector hard but the comeback is happening. (But, not for all properties). Trends already in place were greatly accelerated by the pandemic: ecommerce, grocery delivery, and mega stores such as Target/Walmart acting as fulfillment centers for customers picking up or returning merchandise. Last year at this time, we saw shopping center owners dealing with closed tenants, some paying partial rent or no rent and requesting rent deferrals and/or abatements.

    The recent CBRE Q1 2021 US Retail report has some eye popping statistics. Total retail sales increased 14% year over year. Q1, March 2021 sales growth of 28% was the highest monthly year over year ever recorded by the US Census stat bureau. Consumer sentiment improved to its highest post-Covid level, total net absorption has been positive for 2 consecutive quarters. Demand is high for freestanding single tenant properties as drug stores, grocery stores and fast food have thrived during the pandemic. On the other hand, the road to obsolescence grows for many of America’s large shopping malls. TreppWire reported on a flurry of malls with CMBS loans being handed back to the lender/servicers. The Prizm Outlets Mall in Primm, NV has been liquidated at a great loss to the bondholders. Brookfield is cooperating in friendly foreclosures of the Florence Mall (Kentucky), Bayshore Mall (California) and the Pierre Bossier Mall in Louisiana. Interestingly, the Prizm and Florence properties were part of the infamous “CMBX 6” grouping of bonds. CMBS 6 is a traded index of CMBS bonds originated in 2012, which had a large percentage of malls that rushed to refi as the CMBS “2.0” era began after the Great Recession. Legendary investor Carl Icahn has netted billions of dollars in profits by shorting the CMBX 6, these losses add to his gains. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Blockbuster CPI Above Expectations, Fed Not Worried (Yet), Stock Markets Tumble

    Today’s CPI report was expected to indicate an annual increase of about 3.6%. The actual number at 4.2% is the highest annual increase since 2008. The monthly gain of 0.9% in core CPI was the highest since 1981. Stock markets sold off yesterday afternoon on nervous anticipation of the report and then sold off big today after the release. The Dow and S&P indices were both down around 2% today. Fed and Treasury officials referred to it as a “single data point” and labeled it as “transitory”. However, investors recall the runaway inflation of the late 70s and the consequences of the bitter pill of skyrocketing interest rates prescribed by the Fed in the early 1980s. The 10 year T sold off with the yield hitting 1.70%, 20 bps above last Friday’s opening of 1.50%. The next critical level is 1.77%, the post pandemic era high from late March. The CPI report showed some major price increases in certain sectors: 21% for used car and truck prices (10% in the last month alone), energy prices jumped 25%. Shelter (rent) was up 2.1% year over year. Many commodity prices hitting recent highs include: lumber, steel, copper, semiconductors, corn, poultry, etc. Meanwhile, there is “unbalanced employment” as shortages of workers are affecting industries that are re-hiring due to pent up demand. The Fed policy makers are touting the “base effects” of the inflation numbers that won’t play out until July/August (March-June 2020 numbers were crushed during the initial shutdowns). Issues such as inefficient supply chains, worker shortages stem from the sudden pandemic recovery for which there is no precedent. Still, every data point for the next few months will be endlessly analyzed for the answer: real or transitory? High rates or low rates? How will the cost of capital affect asset prices? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates Stay Put as Powell Doesn’t “Blink” As Economic Growth Surges

    Pascale’s Perspective

    April 28, 2021

    With stimulus, vaccinations, and reopening’s spurring rapid and robust economic growth, all eyes were on Fed Chair Powell today as he discussed this month’s Fed meeting. The top level announcements were expected: no change in the Fed Funds rate (now at zero since last March) and continued quantitative easing as the Fed is purchasing $120 billion a month of treasuries and MBS. The question was, would the Fed’s resolve to continue the ultra-accommodative policies soften? Would there be a hint at when the Fed would start to ease up on these measures, such as lowering the monthly bond purchases. Powell stood firm especially when discussing potential inflation. Invoking classic Fed-speak, he expects inflationary data that will appear in the next few months as “transitory”. He indicated that “upward pressure on prices” over the next few months will be due to temporary factors. These include supply chain bottlenecks stemming from the sudden reopening and “base effects” as the next few months will be compared to the lows of Spring 2020. He again avoided a “taper tantrum” (Treasury sell off) by insisting he is not announcing any plans to slow down the purchases. The question is, when will he? Some Fed watchers believe he will be forced to at the June meeting as growth and inflation data may start to pile up by then. Or possibly, he may feel the right setting and time is the annual Jackson Hole conference in August. The next CPI, core CPI, PCE and core PCE readings will be watched by markets and could spur volatility in Treasuries. Powell spoke of being affected by the large homeless settlement near the Federal Reserve in Washington, he also said he will be meeting with homeless Americans soon. Perhaps the gauge he is really watching is wage inflation, evidence that the economic recovery is reaching to all levels of the economy. The 10 year Treasury has been sitting in a tight range lately at about 1.60%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Powell 60 Minutes Appearance, Tame Inflation Report Keeps Yields in Check (for Now)

    Pascale’s Perspective

    April 14, 2021

    Fed Chair Powell’s appearance on 60 Minutes was well timed, 2 days before a highly watched CPI report. Markets continue to be hyper sensitive to signs of inflation. He struck a familiar theme during the interview as he laid out the conditions for the next rate increase. He reiterated that it will take more than a single monthly report of annual prices increasing above the Fed’s target of 2.0%. Powell gave a very specific answer: “(he would) like to see it on track to move moderately above 2% for some time. When we get that, that’s when we’ll raise rates.” He is well aware that the CPI and PCE figures for the upcoming months may skew above 2.0% due to the “base effect”. The annual increases are based on the 12 months since the depths of the pandemic shutdown last year.

    Yesterday’s CPI report provided a test for markets. The annual CPI rose 2.6% aided by a 9.1% in the price of gasoline. However, the core CPI (which strips out the volatile food and energy components) rose only 1.6%. The 10 year T actually went down as inflation fears subsided and markets focused on J&J vaccine issues. The Fed’s preferred inflation gauge, PCE, will be released on April 30. The 10 year Focus on SFR Prices. The Fed’s nonstop purchases of Mortgage Backed Securities is designed to keep rates down for home buyers. But it may be contributing to runaway asset inflation in the single family home market. Home prices were up 11.2% according to the latest S&P Case Shiller index, the largest rise in 15 years (now that’s real inflation!). This is crowding out many potential buyers. In addition, these buyers have further competition. Homebuilders are increasingly renting out homes and selling to funds. DR Horton built 124 homes in suburban Houston and sold the entire subdivision to a fund. Now foreign capital is targeting homes for rent. Some of Europe’s major insurance companies and pension funds are forming multi-billion dollar ventures to purchase new homes in bulk. They are focusing on sun-belt “move to” markets as young families opt for more space and rent homes. Apartments rents: March data from the realtor.com’s survey of apartment rents rose for the first time since the beginning of the pandemic, a 1.1% increase since last month as secondary locations thrive. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Infrastructure Plans Fuel Treasury Yield Spike

    Pascale’s Perspective

    March 31, 2021

    Looking at the United States as a massive real estate asset is instructive. One could say that the American Society of Civil Engineers Report Card is our property condition report. The 2021 grade is “C-“ with special attention on public roadways, water systems, broadband capacity and the energy grid. A $2 trillion infrastructure plan is being discussed in Washington with uncertainty about how to pay for it. Bond markets are guessing that some increased deficit spending will be involved. The 10 year T bumped up to its recent high of 1.74%. The sell off in treasuries is largely based on the anticipation “inflation is coming, it has to be.” Last week’s PCE index (the Fed’s preferred inflation metric) came in at 1.3% annually. Other factors contributed such as fiscal year end selling of US Treasuries in Japan. The data: the next round of economic reports will tell the tale of the nascent recovery and may indicate signs of inflation. Last month’s reports were dragged down by the February storms that hit much of the country. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Fall, Supply Chain Issues Cloud Data, Hotel Financing Thaws

    Pascale’s Perspective

    March 24, 2021

    Yesterday’s testimony from Fed Chair Powell and Treasury Secretary Yellin included further assurances that ultra accommodative policies will continue. His most resonant comments were regarding the economic recovery which he described as “far from complete” and that sectors of the economy “remain weak”. He again reiterated his belief that the official unemployment rate undercounts actual joblessness. He pegs the actual rate is close to 10% (the official announcement this month was 6.2%). Fed Governor Lael Brainerd chimed in yesterday with a speech. She indicated that the Fed decisions will be results based and they need to see employment on solid ground before making any policy moves. Treasuries rallied on the patient messaging and also on a “flight to quality” amid worries of a “third wave” Covid resurgence in Europe (Germany and the Netherlands imposing new lockdowns). The 10 year T is at 1.61%, down 15 bps from last week’s high.

    The February durable goods orders report indicated a 1.1% decrease after 9 consecutive months of gains. This is being blamed on supply chain issues combined with winter storm disruptions. The manufacturing sentiment remains very strong. The next few months of reports should be very telling as some level of normalcy returns. The blocking of the Suez Canal may be significant. 10% of the world’s trade runs through this key passage which now has a distressed cargo ship turned sideways.

    As the lockdowns took hold last year, financing for hotel properties froze up across the board. As usual, CMBS is the bellwether to watch. The bridge/construction lenders and equity providers all need to underwrite to the permanent loan market. The general guidance from originators and rating agencies is as follows: take 2019 stabilized income, discount it by 20% and then size the loan to a 12-13% debt yield. It’s a start and hopefully as the anticipated pent up demand for travel ramps up, underwriting standards should improve from there. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Rally on Ultra Dovish Fed, Significant Re-openings (Theaters, Gyms, Theme Parks) Boost Confidence

    Pascale’s Perspective

    March 17, 2021

    Today’s Fed meeting was more of a market mover than usual, as evidenced by the stock market hitting a record high this afternoon. For our Sponsors that watch the 10-year treasury closely, Fed Chair Powell did not disappoint today! He did everything he could to convince jittery bond markets that there is no reason to panic (sell). Recent developments (Over $3 trillion in stimulus, vaccine distribution numbers higher than expected) have sent GDP growth and inflation predictions upward. Powell is always hyper aware of Bernanke’s infamous 2013 “taper tantrum” press conference that sent 10-year yields rocketing within minutes.

    Today, Fed Chair Powell made several specific statements with the obvious intent of removing any ambiguity or uncertainty.

    1. The policies of rates at zero percent and $120 billion in monthly bond buying are in full effect, with no rate increases planned until 2023.
    2. As for any tapering of bond purchases, he spoke directly to the bond bears, “As we approach it, well in advance, we will give a signal”. He couldn’t have been clearer unless he executed an order to buy another $100B in treasuries right there at the press conference.
    3. Social message? Powell reiterated that the Fed is willing to let inflation (as defined by the PCE) to run at “above 2%” for an “extended period, to get to full employment. At the same time, he noted the racial disparity in employment and the share of displaced jobs during the pandemic. This is a departure from the “old school” Fed targets of “2 and 5” (ie. don’t raise rates until inflation is above 2% and/or unemployment is below 5%). Inflation is seen as so much less volatile than historically. He seems to be following the “K shaped” recovery theory, with upper and lower classes on different paths. The Fed is determined to let the slack in employment and wages fully recover before making any policy moves. He basically instructed the bond market not to sell off every time a “transitory” inflationary data point is released. The 10-year held at about 1.65% with no major spike in yields. The only bazooka left in Powell’s arsenal would be a repeat of “Operation Twist” whereby the Fed sells short term treasuries (3 month – 2 years) and buys large amounts of 10-year Treasuries. We shall see if that becomes necessary.

    Focus on Retail and the Reopening of Society: This week’s announcements of the reopening of movie theaters and gyms in California, along with partial capacity openings of Dodger Stadium, Angel Stadium, Disneyland, etc. are further advances in the reopening of society. CMBS lenders are open for business for well-performing retail properties and even some hotels at the right basis. With the recent rally in CMBS bonds and relatively low treasuries, originators can price risk in retail with an attractive loan rate. This is significant as CMBS is the traditional permanent loan execution for retail. Their willingness to lend unlocks bridge and construction lending for the product type. Of course, everything depends on the path of the virus and fingers are crossed. By David R. Pascale, Jr. , Senior Vice President at George Smith

  • Tame CPI Data and Well Bid Treasury Auction Calm Inflation Worries, For Now

    Pascale’s Perspective

    March 10, 2021

    Today’s “routine” Treasury auction attracted a huge amount of attention as markets are focusing on potential inflation and rising rates. The recent increase in Treasury yields (0.90% to 1.50% since Jan 20) has unnerved markets in our highly levered economy. The specter of inflated assets being “marked to market” in a higher rate environment has fostered recent market volatility. Investors are hypersensitive to signs of inflation. Today’s passing of the $1.9 trillion stimulus package, recent gains in oil prices, and anticipated unleashing of pent up consumer demand are both harbingers of economic growth but also potential warning signs. Today’s CPI report indicated a 0.4% increase for February with an annual increase of 1.7%. These figures were in line with expectations (note that the February Personal Consumption Expenditures, the Fed’s preferred inflation index, will be announced on March 26). Todays closely watched 10 year Treasury auction went well. With more than adequate demand, the 10 year settled at 1.52% (this was significant as it helped alleviate market concerns that the increasing issuance of Treasuries is not sustainable). A poorly subscribed auction could have triggered a massive sell off, sending yields up towards 2.00%. Stock markets rallied with the Dow index up over 450 points or about 1.5%. (It’s interesting to note that an equity position in the Dow index would yield 1.5% in 8 hours of trading today and that yield would take 10 years to achieve in the bond market!) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith

  • 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