The treasury yield curve is indicating near-term rate hikes and long-term economic slowdown. The 2-Year is 3.04%, 5-Year is 3.14%, and 10-Year is 3.09% (41 bps below its recent high). The markets are betting against the “soft landing” unicorn, as continued hawkish comments by Fed officials indicate that fighting inflation is the priority. Higher unemployment and/or slower growth could be collateral damage. Markets are “treading water” in anticipation of tomorrow’s PCE Report – the Fed’s preferred inflation gauge. The critical component will be the Core PCE monthly increase. Last month’s increase was 0.3%, and the analyst consensus for this month is 0.4%. The report will be the major market mover as we enter the 2nd half of 2022.
Capital Markets Update: Market dislocation is occurring throughout capital markets as securitized lending (both fixed and floating) is slowing. Bond buyers are demanding higher yields, and some lenders are reluctant to clear their inventory and take losses. Some lenders are hitting the pause button on new originations, which then puts increased pressure and demand on lenders still active. New CMBS “full leverage” fixed-rate loans are pricing between 5.75% – 6.25%. “Full leverage” in this case is low leverage, as cap rates have yet to widen accordingly. We are seeing regional banks step up with rates in the low to mid 5’s with the ability to rate lock early. In the bridge lending space, active lenders are extremely busy as some competitors are on the sidelines. This is not a 2008-style “meltdown” as Bank balance sheets are strong and there is liquidity in the marketplace. It is a period of “price discovery” and uncertainty about asset values and the direction of the economy. Stay tuned…
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
