Pascale’s Perspective

  • Treasury Yields Spike and Equities Rally on Old Data

    Pascale’s Perspective

    February 5, 2020

    Last Friday the 10 year closed at 1.50% just 14 bps above its all time low, as coronavirus fears spurred a flight to safety. This week’s upbeat data turned things around as “risk-on” returned. The ADP employment report was significantly more bullish than expected. Note that the manufacturing sector has been lagging in recent months while employment and consumer metrics have been bullish. After Monday’s ISM Manufacturing Index report and yesterday’s Factory Orders report exceeded expectations, markets really took off. The 10 year T jumped to 1.65%. Various unconfirmed reports of potential treatments emerging for the coronavirus added to the rally. However, note that these reports are based on pre-virus data and Asian supply chains are critical to that sector. So there is some caution as the effects and scope of the virus is yet to be quantified. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Holds Steady As Yields Dive on Virus Fears

    Pascale’s Perspective

    January 29, 2020

    During today’s Fed statement and subsequent comments by Fed Chair Powell there was an expressed concern about the “uncertainties” involving the spread of the Coronavirus. Treasury yields dropped and the yield curve is nearly inverted. The 10 year T is at 1.58%, the lowest in months and just 22 bps above its all time low. With the 3 month at 1.55%, another inversion may be at hand. The Fed also indicated concern about inflation and is very concerned that the U.S. does not become another Japan (ultra low rates and growth for decades with no room to cut rates and stimulate). The statement stressed that the 2.0% “symmetrical inflation target” was not a goal to be “near” but needed to be “reached”. Powell noted that the recent PCE of 1.5% was way too low and many Fed board members have indicated a willingness to let inflation go above 2.0% without raising rates quickly, possibly letting inflation “run for a while” hopefully in conjunction with strong growth. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • China Trade Deal Signed, But Uncertainty Remains

    Pascale’s Perspective

    January 15, 2020

    After two years of uncertainty that roiled stock and bond markets, the Phase 1 trade deal has been signed. Now the details are being parsed. Market reaction is basically a “relief rally” as the week to week uncertainty and tensions between U.S. and China have lessened. However, tariffs will remain in place subject to a Phase 2 agreement after the November election. The initial agreement mostly requires China to buy U.S. goods and services (some uncertainty remains whether China can perform on those purchases). This should remove a source of market volatility in 2020 and should be favorable for credit spreads. Treasuries and equity markets rallied with the 10 year Treasury closing at 1.78%. The first CPI and PPI reports of 2020 indicate (surprise) extremely low inflation pressures. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • New Year’s Then and Now, Steeper is Better?

    Pascale’s Perspective

    January 8, 2020

    Today’s yield curve is striking for it’s “normality”, ie. it is uninverted and fairly steep. One year ago today, the 2, 5 and 10 year treasury yields were bunched together, all within about 10 bps (2.55%, 2.58% 2.67%). The yield curve then inverted in August as the 10 year dipped below the 2 year yield. Today’s yield curve (1.57%, 1.65%, 1.87%) indicates confidence in the economy (high 10 year yield) and in the Fed’s promise to stand pat with no rate increase this year (lower 2 year yield). So 2020 begins with lower rates and a healthier curve. With low delinquency rates, an active secondary market, large allocations from portfolio lenders, and overall solid fundamentals, 2020 looks like another big year for commercial mortgage loan volume. For example, the Mortgage Bankers Association predicts an all time high in multifamily lending in 2020. Commercial activity is also predicted to be strong, with the notable exception that lenders are cautious on retail. As the economic recovery goes into year 11, it’s noteworthy that markets basically shrugged off potential escalation of conflict in the mid-East and uncertainty about U.S. China trade resolution.  Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Domestic and Global Developments Fuel “Melt Up” In Treasury Yields

    Pascale’s Perspective

    December 18, 2019

    Behind the impeachment drama, our divided government has been getting things done: new trade agreement with Mexico and Canada, major spending bills (with major deficit spending), an outline of a trade deal with China (some are calling it more of a “trade truce” with the heavy lifting set for next year). The Fed is doing their part by injecting liquidity into the short term markets almost daily, but don’t call it QE. All of these factors along with some positive economic news from Europe and hopes that next year’s Brexit will be orderly have buoyed the 2020 global growth outlook. Treasuries are selling on the sentiment with the 10 year hitting 1.92% today, the highest since July. Maybe those prognosticators that picked a 2.00% 10 year T at year end are pretty close. The rising treasury and relatively stable LIBOR index could return us to a more “normal” index relationship: a steeper yield curve and a 10 year T getting separation from 30 day LIBOR (as the Fed has indicated no rate increases in 2020). So floating loan rates should again be “cheaper” than perm rates. The good economic fundamentals should keep loan spreads tight. In a few weeks, the securitized lenders (CMBS, CLO, etc) will be ready to issue new paper to bond buyers flush with new allocations for the new year. Portfolio lenders will have to compete as the securitized markets often set the bar on spreads.

    Signing off for 2019. It’s been a pleasure writing this column for you and I look forward to an exiting new decade.

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Accepting “New Normal”, Takes Rate Increases Off the Table for 2020

    Pascale’s Perspective

    December 11, 2019

    Today’s Fed statement and remarks by Fed Chair Powell reflected a continuing change in the relationship between interest rates, economic stimulus, employment and inflation. 2019 resulted in three rate cuts (“mid-cycle adjustments”) which helped spur record stock market highs and low employment. Last week’s Jobs Report was a blockbuster even after accounting for the end of the GM strike. As those increases were implemented, many of the Fed participants indicated expectations of increased inflation this year as employment rose. The theory that full employment will result in inflation has been a bedrock of economic theory for decades. With unemployment at 3.5% and the PCE index at 1.6%, the theory is being tested and failing. By signaling no rate increases for 2020, the central bank is basically daring inflation to return. Many are concerned by polling indicating that public expectations of inflation are at historic lows. Which means that market participants are expecting low inflation and that may create a “self-fulfilling prophecy”. This week’s sad passing of legendary Fed Chair Paul Volcker brought back memories of the Fed’s most significant inflation battle. With inflation running at 12%, Volcker increased the prime rate to 22%, stopping inflation and causing significant pain as unemployment rose. Long memories of the early 1980s move markets to this day as treasuries sell off if inflationary news is in the headlines. The Fed feels that they have reached the “neutral rate” and it’s time to watch the effects. Stay tuned.

  • Data, Headlines and Rumors Move Markets in Volatile Holiday Month

    Pascale’s Perspective

    December 4, 2019

    Treasuries will react to the following factors: (1) Economic reports this week: Factory orders on Thursday (manufacturing has been shaky in recent months as the economy is being carried by the ever spending consumer); The unemployment report this Friday, December 6 (watch the wage trends) and December 15 (China/US tariffs are set to go into effect unless the parties reach some type of agreement or an agreement to possibly agree later). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Stay Positive” and Other Clues in the Fed Notes

    Pascale’s Perspective

    November 20, 2019

    Lot’s of talk (and tweets) lately about “going negative”, that the U.S. should consider negative interest rates just like Japan and Germany.  Today’s notes from last month’s Fed meeting indicated that the “benefits of negative rates abroad are mixed” and would create “significant complexity or distortions to the financial system”.  However, other esoteric tools for stimulus may be considered, such as a form of quantitative easing called “yield curve control” whereby the Fed sets an upper limit for short term treasury securities by purchasing enough of them to “cap” the yield.  This would be another large commitment to expanding the balance sheet as these purchases could be massive.  Speaking of the yield curve, the 10 year T is again dropping, today at 1.71% after hitting 1.95 11 days ago.  Negative news on the possible US China trade deal, now complicated by Hong Kong unrest.  Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates and the Limits of Monetary Policy

    Pascale’s Perspective

    November 13, 2019

    Fed Chair Powell’s congressional testimony was possibly overshadowed by other matters before Congress, but significant nonetheless. He reiterated the message from the last Fed meeting: the mid-cycle adjustment (3 rate cuts in 2019) is over, and the Fed is pausing. It was like a victory lap after stock markets hit record highs this week and he commented that the “economy remains consistent – moderate economic growth, a strong labor market”. The futures market is predicting “no cut” until well into 2020. So we seem to be finally at the “neutral rate” of about 1.50% (note that many Fed participants pegged the neutral rate to be about 3.50-3.75% in recent years). And the Fed stands ready to act if “developments emerge that cause a material reassessment”, so we are back to watching the data. Powell put his audience (Congress) on the spot. He mentioned that the present rate of deficit spending is “unsustainable” and that the USA’s debt burden will make it difficult for future Congress’ to actually engage in fiscal policy (stimulus, infrastructure) during the next downturn. He was basically saying that monetary policies have reached their limit (note that he shot down any talk of negative rates in the U.S.) and that fiscal policy is lagging and hamstrung by the budget deficit. However, Congress is busy trying to pass another stopgap 30-day funding bill to avoid a government shut-down before Thanksgiving.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Meet The New Yield Curve, Same as the Old Yield Curve”

    Pascale’s Perspective

    November 6, 2019

    Remember all of the recent doom and gloom predictions and market volatility when the yield curve inverted back in August? The 2 year bond yield drifted above the 10 year yield. This traditional “recession predictor” caused large selloffs in equity markets and ironically drove long term bond yields down, further aggravating the inversion. After last week’s Fed cut and other stimulus, the effect has been to push short term bond rates below the 10 year. Note that, the Fed’s recent repo market liquidity injections involve buying short term T bills, driving those yields lower. On the long end, the 10 year yield has been rising due to, wait for it, stop me if you’ve heard this before, anticipation of a trade deal between China and the US (if only they could decide where to meet and whether to call it “Phase 1”). Today’s 2 year T closed at 1.61% and the 10 year T closed at 1.82%. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Are We There Yet? Yes, But “There” Has Moved

    Pascale’s Perspective

    October 30, 2019

    Today’s Fed announcement and subsequent press conference by Chair Powell was a textbook case of well communicated policy. Basically, the Fed announced a 0.25% rate cut and indicated “that’s it” for this round of cuts. And markets didn’t freak out as they usually do when the punch bowl is being taken away. This “mid cycle adjustment” consisted of 3 rate cuts (July, September, October), the first rate cuts in a decade. Today’s Fed statement removed the key phrase “will act as appropriately to sustain the expansion” That may have roiled markets, but Fed Chair Powell then said the words that soothed markets worldwide: “I think we would need to see a really significant move up in inflation, before we would consider raising rates”. With worldwide inflation basically “stuck” at about 1.0-1.5% (well below the 2% Fed target), this basically provided a “ceiling” at today’s short term rate of 1.5%. It also helped pushed 2 year treasury bonds down to 1.60%, further “un-inverting” the yield curve back to a normal shape. Well done Mr. Powell – the 10 year closed at 1.78%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Going Negative?

    Pascale’s Perspective

    October 23, 2019

    The Fed Futures market indicates a 94% chance of a 0.25% rate cut next week. A December rate cut is also priced in to market expectations. 30 Day LIBOR is now 1.82% (appropriately since the Fed Funds target is now 1.75-2.00%). This means LIBOR should close the year out at 1.25%, leaving very little room for further cutting (assuming the U.S. does not “go negative” on rates). That assumption may be in question as a leading Fed economist analyzed 5 other central banks that instituted sub zero rates starting in 2012. The U.S. Fed held rates at near zero from 2008-2015. The paper suggested that the U.S. recovery would have benefited from negative interest rates, so the next recession may feature sub-zero in the U.S. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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