The 10-year Treasury yield dropped back down to 2.03% today after yields rose early in the week after a positive report on US Housing. Global issues are again in focus by investors looking for flight to quality; Japan exports hit a 13 month low, Canada downgraded its growth outlook for the next 2 years, another China stock market selloff, oil prices drop after recent rallying. The 10-year Treasury and Swap have settled in a trading range of about 2.00% for the past few weeks. Watch for markets to focus increasingly on the US Congress, Senate, and President dynamics: RE; negotiations over the upcoming Debt Ceiling deadline (November 3 according to the Treasury Secretary). Recent short term Treasury yields have spiked from 0% to 0.18%, the highest yield in 2 years – since the last debt ceiling deadline in 2013. As the deadline gets closer, longer term treasuries, credit spreads, LIBOR, and other indexes may get volatile, depending on the news from Capitol Hill. As for the Fed, an October rate increase is highly unlikely, especially before the debt ceiling is resolved. CMBS: New pools are pricing with AAA 10-year expected to hit Swap + 125. Spreads remain soft with some widening as the lower tranches widen, especially in the BB and B (lowest rates pieces). This is causing B piece buyers (they buy BB, B and unrated bonds) to increase their yield requirements 200 basis points (to 17%) and flexing their rights to kick out loans they don’t like. New 10-year full leverage applications are pricing S+250/280; all-in coupons in the 4.50% to 4.80% range….stay tuned… David R. Pascale, Jr.
