Worldwide uncertainty has resulted in a flight to quality, the 10 year Treasury is at 2.19%, down about 20 bps during the past two weeks. CMBS spreads are widening with originators watching new pools in the market. AAA’s are approximately Swaps + 110 with more widening in the subordinate classes; we are seeing new 10 year quotes anywhere from Swaps + 215-240, a wide range as originators are less certain how to price. The good news is that lenders are still quoting, locking and closing. All-in coupons for 10 year full leverage are about 4.75%. Greece: The economy of Greece is about the same size as Alabama. Over the past few years, the ECB and IMF have become the chief holders of Greek debt, there is extremely little exposure to Greece by banks and other private institutions. Yet credit, bond and stock markets are reacting (overreacting?) to every development, hoping for another agreement. It’s a study in market psychology. The fear of “contagion” is rampant. Greece seems to be applying “gaming theory” to their negotiations, as they bargain for better terms from their creditors by displaying a willingness to default and cause pain not only in their country, but potentially throughout Europe and beyond. If they get concessions (especially a “haircut” ie debt relief), it could encourage larger economies such as Italy, Portugal and Spain to bargain in a similar fashion. US markets which seemed to be “data driven” early this year (swung by economic reports, etc) are now “headline driven”. All eyes are now on Sunday’s European summit (aka last chance for a deal), Monday’s bondholder meeting in Puerto Rico, China’s stock market, Iran nuclear talks, etc. Everything is connected, example: an Iran deal that removes sanctions combined with further erosion of China’s economy and a Greek exit from the Euro, could accelerate oil’s price decline. This would put the Fed’s and the ECB’s inflation targets farther out of reach, delaying rate hikes and possibly leading to more QE….stay tuned…. David R. Pascale, Jr.
