Today’s Fed meeting was the first of eight for 2021. Fed Chair Powell set the tone for the year as he reiterated many of the 2020 issues that remain. Powell remarked, “We have not won this yet”, in reference to the economic recovery. He tamped down recent comments by Fed governors regarding a pullback in Fed bond purchases. He spoke about the $120 billion in monthly bond purchases that will continue until “substantial further progress” is made on both employment and inflation. The Fed is more concerned about job market weaknesses and less concerned about inflation. The message is that any changes in policy will be telegraphed months in advance and a reappearance of inflation would be allowed to “run” for a while before any policy changes. This should forestall any chances of a 2013 style “taper tantrum” where long term rates spiked quickly in a sell off due to confusing messaging from then Fed Chair Bernanke. This policy combined with the potential of “yield curve control” should give comfort to commercial real estate borrowers that the bedrock index for financing, the 10 year T, is benefiting from the accommodative monetary policy. The 10 year T closed today at 1.02%, after hitting a high of 1.15% earlier in January.
What about spreads? CMBS, Agency and Life Companies are pricing 10 year loans in the 2.75% – 3.75% range generally as a variety of factors are helping spreads stay:
(1) Overall economic recovery and the hoped for “return to more normal”;
(2) Investor appetite for real estate based bonds: CMBS, Fannie, Freddie, (especially in the Covid era); and
(3) Rising oil prices stabilizing the huge corporate bond market as energy companies are large issuers of debt.
This calms volatility in overall credit spreads. Floating Rate: The healthier securitization market is creating more liquidity in the bridge loan market (usually via Collateralized Loan Obligations or CLOs). Well underwritten apartment bridge loans are being funded in the 4.00% all-in range or lower. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners