10 Year T Yield Drops, Loan Rates Don’t

As Fed Chair Yellen addressed Congress today, the government auctioned $23 Billion in new 10-year bonds and the 10-year Treasury hit 1.69% in trading.  Yellen indicated financial conditions have become less supportive for growth and noted the volatility in foreign economies, specifically China.  Markets are interpreting her comments as “no rate increase at the March meeting” with the next increase now expected in September at the earliest.  Interestingly; she noted that borrowing costs for commercial real estate are among the factors the Fed will evaluate in determining policy.  Yields are dropping on flight to quality.  CMBS/Life Company rates:  CMBS spreads continue to widen as the index falls.  The 10-year AAA bonds for new issues are pricing in the T + 155 range after hitting a high of about T + 165 in recent weeks.  However; B-Piece buyers are demanding more yield, up 200 basis points to 19% in recent months.  B-Piece buyers and a general market “risk off” mood are contributing to tighter underwriting (less cash out, more conservative terms on hotels, etc) constraints.  All-in rates for full leverage 10-year loans are priced 5.00-5.25% for CMBS.  Life Companies originated a high volume of loans in 2015, and have similar allocations for 2016, but as one major originator remarked, “that will be more difficult” and “we are not going down with the Treasury” as loan rates are being floored and/or spreads are widening.  Everything is connected: The troubled energy sector is a big part of the corporate bond market, spreads are widening on their debt and the “contagion” is affecting other non-energy debt.  This in turn widens spreads for Life Company “alternate investments” which widens spreads on real estate loans.  All-in rates (65% LTV) for 10-year life company loans are in the 4.25-4.75% range.   Stay Tuned.   David R. Pascale, Jr.