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

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, dot.com 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