Pascale’s Perspective

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    “Static” Low Rates Bringing Borrowers Back to the Table

    Pascale’s Perspective

    April 10, 2019

    Several fixed rate lenders (agencies, Life companies, CMBS) have indicated that the recent drop in fixed rates is spurring increased activity in refinances and acquisition loans.    It’s another “perfect storm” as fears of a global growth slowdown and lack of inflation are keeping treasury rates low and a general “risk on” trade is contributing to relatively tight credit spreads.   Note that spreads have increased slightly in recent weeks in reaction to the lower index, but the increase is more than offset by the drop in Treasuries.   One of the main factors keeping Treasuries low is the abating fear of inflation.   Remember last November, when “inflation was coming back” and a 3.23% 10 year Treasury was just a signpost on the way to 4.00%?   That is now ancient history.   Today’s headline on the CPI report indicated 0.4% monthly headline inflation but markets focused on the 0.1% “core” number excluding the volatile food and energy sectors (but isn’t that the stuff everyone buys? Food and gasoline?)   Regardless the remaining core number may be slightly skewed lower due to new methodology on apparel prices.   The 10 year T is at 2.46%. Stay tuned.
    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Fiscal Stimulus Fades, Monetary Policy is Taken For Granted, Time for a Trade Deal?

    Pascale’s Perspective

    April 3, 2019

    After Treasuries hit a recent low last week due to Fed and ECB committing to low rates for the time being, markets jumped on Monday as the US and China both exceeded expectations with robust manufacturing reports. The China report was especially well received as it helped assuage global growth concerns. However, today’s ADP employment report indicated that US companies added the fewest workers since March 2017, steepest drop in construction jobs since 2012. It could be an anomaly (seasonal, weather) or a sign that the long hiring boom is slowing as the effects of the tax cuts wear off. So if the big fiscal policy effects are waning and interest rates seem to be low but static, what is the next jolt for the economy? It may be that 2 long simmering issues may be “solved” soon: US – China trade agreement and a softer Brexit. Treasury yields increased today after the disappointing jobs report. Either traders are waiting for Friday’s major employment report or were looking ahead to the trade deal? The 10 year is at 2.52% with all in 10 year loan rates in the 4.00% – 4.50% range. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    ECB Joins Fed, Not Quite Ready to Remove Accomodation

    Pascale’s Perspective

    March 27, 2019

    The 10 year Treasury hit 2.34% today, representing its lowest level since December 2017, as “capitulation” seems to be contagious amongst the major central banks. Last week our Fed and this week the ECB. Draghi comments sound familiar: not worried about inflation, sees growth risks and”substantial accommodation” was still needed to get inflation to their target levels (if ever?). Worldwide sovereign debt yields have plummeted. We are likely in a period of relative inaction by the central banks as they monitor the data. Interestingly, the 10 year Treasury (2.35%) is lower than 30 day LIBOR (2.49%) Regional bank stocks are being hammered due to the inversion of the yield curve, they can’t borrow short and lend long at a profit. But credit spreads are narrowing (corporates, CMBS, etc.), with lots of equity (funds, etc.) sitting on the sidelines. Even with debt costs at such a low level, deals need to pencil, income needs to increase in a low inflation environment. The news/data cycle suggests there is reason to believe in both safety (Negative news in Europe, fears of the slowing global economy) or risk (optimism about trade talks with China, full employment, wage increases) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    The Fed Tries to “Nail the Landing” (For Once), Yield Curve

    Pascale’s Perspective

    March 20, 2019

    Today’s Fed announcement and subsequent news conference by Chairman Powell made the recent “about face” official.   Not only did the Fed not raise rates today, it indicated (via the infamous “dot plot”) that there are NO increases planned for 2019.    In fact, futures markets now predict a rate cut before any future rate hikes.  The Fed is not afraid of inflation, between steady commodity and energy prices and consumer prices remaining flat, the old relationship between full employment and inflation appears to be officially broken (RIP Phillips curve).  Powell also spoke of slowing growth in the US, China and Europe.  As the effects of the tax cut wane, he noted “slower growth of household spending and business fixed investment”.  Today’s comments had the feeling of an economy in “balance” with Powell again indicating the present Fed rate is, “in broad estimates of neutral”, advocating for patience and (importantly) that the data does not justify a move in either direction.  Past Fed actions (rate increases during expansions) have been blamed for causing recessions and cutting economic rallies short.   Maybe things are different this time?  Maybe the lack of inflationary pressures are allowing this Fed to “stop and smell the roses” while the economy enjoys a plateau instead of a peak? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

     

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    The New Normal Goes On and On, Forever?

    Pascale’s Perspective

    March 13, 2019

    The “new normal” of low interest rates and central bank accommodations (quantitative easing, etc.) was supposed to end when the US and world economies got back on their feet. The “training wheels” could then come off. Recent developments continue to suggest that the training wheels may be on for a while. The Fed has been quite dovish lately with rate hikes on hold and announcements that the balance sheet reduction will end this year. Recent inflation data is very interesting: last weeks jobs report indicated the highest wage inflation in recent years. Today’s PPI report showed a 0.1% rise in producer’s prices and, very significantly, little or no inflation in the “pipeline” which predicts inflation over the next few months. The Fed watches wage inflation closely but will base their rate decisions on overall inflation, therefore, today’s report is dovish. Brexit and China trade agreement uncertainty is also weighing on markets, keeping yields low. The 10 year T hit a recent multi-month low at 2.59% yesterday and today is at 2.62%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    The “Old Normal” Remains Elusive – ”Not so Fast Taking That Punchbowl”

    Pascale’s Perspective

    March 6, 2019

    The plan was simple: central banks injecting massive liquidity into the system to bring the world out of the post crash doldrums.  The Fed’s dual mandate of low inflation and high employment would eventually force its hand as low unemployment would lead to increased wages and inflation (aka: a hallmark of the “Old Normal” called the Phillips Curve which posits a “stable and inverse” relationship between inflation and unemployment). During the past few years, it seemed like this scenario was taking hold as the Fed was telegraphing multiple rate increases, the ECB was winding down their stimulus, wage inflation was finally stirring, etc. But, recent developments indicate a slowdown in growth (recent forecasts for China, the US and Europe all trending lower), low inflation (the Fed’s inflation gauge, PCE, remains below the 2.0% target and oil prices unable to sustain recent gains) and very low unemployment still not moving wages significantly, especially for the low wage earners. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Interesting Testimony Today (Not “That” Testimony)

    Pascale’s Perspective

    February 27, 2019

    Was anyone watching the congressional hearing testimony from Fed Chair Powell or US Trade Representative Lighthizer? Powell highlights: Policy is “in the range of neutral”. Wow, the turnaround is complete on “where we are”. Remember early October when he spooked markets by saying we are “a long way from neutral”? Note that the Fed Funds rate was 2.25% at that time, speculation was the target neutral rate was somewhere between 3.25-3.50%, so the expectation was for at least 4 more hikes in the next year or two. Now, we are “there” which indicates the Fed feels no urgency to hike and is watching the data (unemployment and inflation). But today also showed a subtle shift in Fed concerns: financial market volatility, not usually a part of the stated Fed mandate. As Bloomberg pointed out, this concern for market stability is reminiscent of the “Greenspan put”. These developments are contributing to overall bullishness in Treasuries, the 10 year T is at 2.67%.  Meanwhile, across the hall, Trade Representative Lighthizer tamped down some of the recent anticipation of an imminent trade deal with China, which was heightened in recent weeks with the extension of the March 1 tarriff deadline and talk of a signing ceremony in the US soon. He indicated hurdles remain, so it may be a while. This “bad news” of course helps the contrarian bond market. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Markets Usually Don’t Like Uncertainty, But Today They Do

    Pascale’s Perspective

    February 20, 2019

    The old maxim about financial market aversion to uncertainty is well known. However, today’s unusually newsworthy release of Fed minutes from January saw markets cheering uncertainty. It seems that the Fed’s “dot plot” indicating two planned rate hikes in 2019 is by no means set in stone (note that previous dot plots indicated three rate hikes in 2019). As I discussed last month, the futures market has been skeptical of the dot plots. That predictive market has been indicating a probability of zero hikes in 2019. Today’s Fed minutes release put the matter to rest (for now) as a majority of the participants are uncertain about any future rate hikes this year. The statement cited an uncertain atmosphere of risks to economic growth and very little concern about inflation. Of course there is a contrarian aspect to all of this: stocks and bonds rallied based on a more pessimistic outlook on the economy. Very significantly, the Fed addressed the “elephant in the room”, their huge balance sheet and its ongoing program to reduce holdings by selling bonds as they mature. Today’s minutes also showed participants broadly agreeing to announce a plan to stop balance sheet reduction later this year. This is a paradigm shift. It seems the Fed is planning on retaining a very large balance sheet on a near permanent basis. All of this helped drive the 10 year T yield down to 2.64%. With fixed rate loan spreads for agency, CMBS, LifeCo, etc ranging from about 130-200 depending on property metrics and leverage, all in rates range from 4.00% to 4.60% approximately. Again, its not too late to lock in historically low fixed rate financing. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Deadlines Loom, Securitization Markets In Gear

    Pascale’s Perspective

    February 6, 2019

    The 10 year Treasury yield has settled into a range of about 2.65-2.75% in recent weeks as the “Goldilocks” outlook is in vogue: not too hot, not too cold: the economy is strong with potential headwinds and slowing growth with little inflation. With the shutdown now over (for now), Washington deadlines are in the spotlight: February 15 to pass another funding bill, March 1 to finalize a trade agreement with China (or big tariffs ensue), and very important is the March 1 reinstatement of the debt ceiling. This means that the government will have a few months of financial manipulation before defaulting on US Treasury debt. Now comes word that the debt ceiling extension may be rolled into the government funding talks. CMBS/CLO: Floating rate securitizations are going very well after a post crash record 2018 of issuance, some originators are cutting spreads accordingly. The first 2019 CMBS securitizations are pricing soon, but pricing talk is optimistic, about 5 bps inside of the final 2018 pools. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    “Patience” is a Virtue

    Pascale’s Perspective

    January 30, 2019

    The Fed’s unanimous decision to not raise rates today and subsequent comments from Fed Chair Powell set markets soaring. The “contrarian” dynamic is alive and well: The Fed delivered “bad” news (the case for raising rates has “weakened” due to global growth concerns such as Brexit, China’s economic slowdown, etc.) and markets cheered as that will keep rates from rising. Interestingly, the Fed asserted its independence, denying they are bowing to political pressure and insisting these moves are “data dependent”. An unprecedented separate statement on the balance sheet seemed to be a nod to the market concern that “quantitative tightening” (the gradual selloff of Fed assets such as Treasuries and Mortgage Securities) is not on “autopilot” but is also data dependent. Futures markets now predict no new rate increases this year and even a rate decrease for next year. The 10 year yield dropped to 2.67%, nearing its recent bottom of 2.56%….Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    Government Uncertainty May Roil Markets

    Pascale’s Perspective

    January 23, 2019

    The longest Government shutdown in history is by definition “uncharted territory” and may push markets. Potential effects that may begin to “pile up”: no economic reports for markets to interpret, federal agency causing slowdowns in economic activity (TSA, USDA inspectors, etc), consumer/business confidence erosion, potential global investor impatience and avoidance of US dollars/treasuries (ugh! – especially if the shutdown begins to affect the upcoming debt ceiling debate). With no end in sight, the only “ray of light” from Washington has been a potential trade deal with China (who seems to need to make a deal). The 10 year T seems to have settled in a range of 2.70-2.80 lately, today at 2.75%. CMBS: With no pool having been securitized since before Christmas, originators are slightly “flying blind” looking for a level to price off of. Whisper talk on upcoming pools indicates some narrowing may be in the cards (AAAs at Swap + 95 as opposed to over 100 in December). All-in rates for full leverage loans is right about 5.00% (again). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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    The Fed’s New Years Resolution: Be More Dovish

    Pascale’s Perspective

    January 9, 2019

    Fed Chair Powell kicked off the dove-fest last Friday with his remarks at the American Economic Association’s annual meeting. He said all the right things that markets wanted to hear.  Powell’s December statement and press conference spooked markets into believing that the Fed was on a preset path to raise rates twice in 2019, regardless of the economic environment. Last Friday, he indicated that the Fed was “flexible” and could be patient in light of “muted inflation readings”.  Another buzz word is emerging: “Patience” as the Fed will “listen very carefully” to the market. Powell also addressed the issue that many believe triggered the major volatility during his December speech: the pace of balance sheet reduction. Now he “wouldn’t hesitate” to alter the pace of reduction based on current events. Powell stood with past Fed Chairs Bernanke and Yellen at the Friday event. Perhaps he and Bernanke discussed the “taper tantrum” sparked by Bernanke’s remarks in 2013 regarding potential slowing of bond purchasing by the Fed. Markets rallied big on Friday. This week, other Fed participants have reinforced the message, indicating flexibility and patience. Futures markets indicate zero or one increase in 2019 and a possible rate cut in 2020. The 10 year Treasury dropped to 2.55% last Thursday (pre-Powell remarks) and has now settled at 2.70%. Markets are watching Washington: Government shutdown (how long?) and trade talks with China (is a deal imminent?). Spreads have widened during this recent volatility. The CMBS market is looking for guidance from the first few securitizations of 2019 now under way. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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