December 16, 2020
Today’s Fed meeting and policy announcements showed the central bank committed to years of low rates and continued bond purchases with little fear of inflation. Markets were focused on the bond purchases and many were hoping for guidance indicating the purchase of longer term treasury bonds. The Fed’s $120 million of monthly bond purchases will continue as they “foster smooth market functioning and accommodative financial conditions, supporting the flow of credit”. A move to buying more longer term bonds (10 and 30 years) would alleviate fears that stimulus and deficit spending would lead to long term yields rising. No such announcement was made and the 10 year T is at 0.92%. The Fed balance sheet sits at $7.3 trillion and total US outstanding debt is $27.5 trillion. Note that at the end of 2007, the Fed balance sheet was at less than $1 trillion and US debt was $9 trillion. Supply/demand concerns are warranted. Meanwhile, Congressional negotiators are optimistic that they are on the verge of passing a $1.4 trillion spending bill for next year and about $900 billion in long awaited stimulus.
With vaccinations beginning this week in the US, there is cause for optimism, but it’s pretty certain that the next three months will be extremely challenging for public health and the economy. Both sides of the aisle agree: the stimulus bill is a “must pass” before this Congress adjourns. There is talk of a weekend session and possibly negotiating into next week with another one week stopgap being passed by Friday.
This is the final Finfacts of 2020, a year that has seen many challenges. I hope everyone has a safe and happy holiday season and best wishes for 2021. Stay tuned.
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
December 9, 2020
Treasury yields dropped slightly and stock market rallies took a pause. Why? Critical negotiations on U.S. Covid relief in Washington and the UK/EU Brexit talks are both hitting stumbling blocks with deadlines for both looming this weekend. The 10 year T is at 0.93%. Last Friday’s November’s weaker than expected jobs report indicated a sputtering recovery with slowing job growth. The data combined with rising Covid caseloads/hospitalizations have added further urgency to Congressional and administration stimulus negotiations. It looks like they are kicking the can into next week with a 1 week government funding extension, creating a must pass date for next Friday, December 18. Congress will then recess for the year and a “no deal” would allow jobless benefits, student loan forgiveness, eviction moratoriums, Fed assistance programs and more to expire. The failure to act would also deprive the economy of badly needed stimulus.
“V-Day” in the UK this week: vaccinations have begun! The world saw the Pfizer vaccine being administered to elderly citizens of the UK this week. The U.S. FDA is expected to approve the Pfizer vaccine this week and shots could begin in the U.S. next week. The UCLA Anderson School Economic Forecast, “A Gloomy Winter Followed by An Exuberant Spring” was released today. It predicts a robust “service recovery” led by healthcare, restaurants, recreation, travel and accommodation in 2021. Analysts have estimated that U.S. consumers have about $1.3 trillion in excess savings built up during the 2020 pandemic. As most consumer goods have been available for purchase with the boom in e-commerce, the thinking is that there is big pent up demand for travel, entertainment, live events, etc. This can’t come soon enough for the beleaguered hotel and retail sectors. A look at hotel loan maturities shows over $20 billion of hotel loans maturing in 2021 (as opposed to about $8 billion this year and an average of $7 billion for 2022-2029. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
December 2, 2020
Britain’s approval of the Pfizer vaccine means that shots will be given within days. The US is expected to approve vaccines by Pfizer by December 10 and Moderna by December 17, with shots being given by December 20. This optimism is tempered by record numbers of infections and hospitalizations nationwide going into winter. US officials indicate that 100 million Americans will be vaccinated by March 1, with over 70% of the population Congress is scheduled to adjourn for the year after December 11. The spikes in infections combined with the expiration of unemployment benefits and eviction moratoriums on December 31 is putting enormous pressure on Congress to finally pass another stimulus bill. Today, lots of optimism after months of failed attempts: a group of senators is circulating a $900 billion package that has bipartisan and bicameral support. Hopes are high but nothing is certain. The 10 year treasury hit 0.92% today. Stimulus and 2021 recovery hopes are contributing to the long term optimism. The Federal Reserve has indicated they will do everything in their toolbox to keep interest rates low. In order to assure low rates going into 2021, the Fed is expected to announce adjustments in their bond buying, which is now at $120 billion per month. The central bank is considering increasing their purchases of 10 year Treasuries, which will keep yields low going into 2021. Commercial real estate capital markets and borrowers will benefit from this policy. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
November 18, 2020
Last week it was Pfizer and this week its Moderna: more positive news about the availability for a Covid vaccine. Pfizer is expected to apply for approval for emergency use of their vaccine as soon as this Friday, vaccinations will start this year. This hugely positive news is in contrast to the situation today: spikes in infections, hospitalizations and possible restrictions going into the holidays. Today’s announcement that the NY school system is closing and switching to remote learning rattled markets. The 10 year Treasury yield that nearly hit 1.00% last week dropped to as low as 0.84% today. Yesterday’s weaker than expected retail sales numbers also contributed to the drop in yield. The urgency of a “final” stimulus bill that can act as a bridge to the wide distribution of a vaccine is becoming apparent. Several cliffs loom at year end: federal unemployment insurance, student loan payment freeze, mortgage forbearance and eviction moratoriums. The hope now is for the lame duck congress to pass stimulus as part of the efforts to continue funding the government beyond December 11. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
November 11, 2020
Monday’s announcement of positive Phase 3 results from Pfizer’s vaccine trials caused one of the largest stock market rallies ever, which has continued throughout the week. The anticipated timeline for approval is this month. December – vaccinations for most vulnerable. January – vaccinations for first responders/health care workers. March/April – should be widely available. Experts such as Dr. Fauci and Sir John Bell are predicting life “returning to normal” by Spring 2021. Stay at home stocks such as Zoom saw values drop. Sectors including “return to normal” stocks such as tourism, airlines, movie theaters, theme parks rallied. Interest rates moved as the 10 year treasury jumped from 0.80% (Monday morning) to 0.98% as of today (look for 1.00% as a key technical level). The prospect of an “endgame” to the COVID crisis should theoretically return yields to their pre-COVID levels (10 year at about 1.50%). It will be interesting to see how this affects capital markets and lending criteria on the different sectors. Will next summer see consumers back to pre-COVID “normal”, ie. returning to indoor restaurants, movie theaters, gyms and traveling to crowded conventions? Lots of variables remain. For example, no one expects office occupancy to snap back to 2019 levels. The switch to work from home, either part time or full time, will remain for many workers. Lenders will be scrutinizing these trends when determining underwriting standards going forward. It’s definitely a game changer for hotels and retail. Owners in distress can now see their way to a better day. This may stave off the feared bloodbath of properties and loans being sold at bargain prices. Lenders typically reluctant to foreclose on properties will hopefully help existing borrowers get to a mid 2021 recovery. Of course, this brings the spotlight back to fiscal and monetary policy. Will there be a help for small businesses, tenants, homeowners, commercial real estate owners, etc? Congress is again sending signals that a stimulus will pass. Now the anticipated timing is before year end during the lame duck session. December 11 is the deadline to avoid a government shutdown. Stimulus could be baked into that. Hard to predict in today’s environment. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
November 4, 2020
Note to our readers: This column is not an endorsement of any candidate but is meant to discuss the capital market reactions to the post-election outcome.
Much like 2016, yesterday’s US election and the continuing aftermath have led to market volatility as investors struggle to understand the results. Once again, the polls failed to predict the actual results. As votes were being cast yesterday, investors were assuming a potential “blue wave” with Democrats in control of the Presidency, Senate and House. Equity markets staged a “relief rally” on the certainty of a definitive result. Treasuries sold off. The 10 year Treasury yield spiked to 0.96% after hours as investors assumed passage of another big stimulus package and potentially other major federal spending such as infrastructure. This bet on big fiscal policy meant lots of new treasury issuance so a sell off occurred. As the results came in during the evening, it became clear that the House and Senate were going to be split and the Presidential result would be uncertain for a few days at least. This scenario put stimulus and infrastructure expectations in reverse. Combined with the uncertainty of the Presidential result, a flight to quality was underway. This increased appetite for treasuries and the yield dropped 20 bps to about 0.75% this morning. Wall Street traditionally likes a divided government as that provides certainty of no major policy changes. But this hope is complicated by the need for some stimulus to avoid a long drawn out recovery from COVID-19 pandemic. The anticipated lack of fiscal policy will now put added pressure on the Fed to provide continuing accommodative monetary policy. I would expect that Fed chair Powell will address this tomorrow at his press conference for the November meeting. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
October 28, 2020
For months investors have been pricing in optimistic scenarios: another big stimulus package, COVID treatments and/or vaccines on the horizon. This week has seen massive stock market selling and treasury yields dropping (risk-off).
Stimulus: Congress has recessed until after next Tuesday’s election with no deal. As analysts had “priced in” some pre-election stimulus, the market sell off was inevitable. So now the hopes for more stimulus are for the “lame duck” period. Trying to predict the likelihood of an agreement based on all the election variables is extremely murky (which party-parties will control the House, Senate, Presidency)? If the election results spur no action during lame duck, relief will not come until February 2021 at the earliest. We may see a “relief rally” next week if there is a good level of certainty surrounding the results. The need for stimulus is increasingly urgent as recent COVID developments are alarming. Another election variable is a disputed result scenario. Spikes have occurred in Europe and the US as the weather turns colder. Even with promising late stage vaccine trials and approval possibly by year end, the path to “normal” is now predicted to last well into 2021. Dr. Fauci today put it in perspective as he opined that it will take several months to achieve anything close to acceptable herd immunity. This puts the onus back on Washington to provide fiscal policy. The 10 year treasury dropped 13 bps to about 0.75% over the past few days. It’s a good bet that treasuries and other indices will remain low as central banks crank up the purchases. The question for commercial real estate investors is what direction will risk spreads and loan underwriting criteria take going into 2021? By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
October 21, 2020
Stop me if you have heard this before, but stimulus talks have taken on new urgency with a potential agreement in the next few days. The question now is if the votes to approve will take place before or after the election. The talks have taken on new urgency as jobless claims increase, highly publicized layoffs by large companies, an anticipated spike in COVID infections, etc. Equity markets have rallied and treasury yields have spiked based on the expectations of an agreement. The 10 year treasury is at 0.82%, the highest level since June. Note that the 10 year Treasury dropped as low as 0.31% in March during the initial COVID crash. Other factors contributing to the rise in yields are the Federal Reserve’s decision not to implement “yield curve control” (meaning the Fed would buy enough Treasuries to keep long term rates at a certain level) and the huge supply of Treasuries (due to the US budget deficit). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
October 14, 2020
The 10 year Treasury was flirting with 0.80% last week about 15 bps above its recent average level. Interestingly, vaccine concerns led to a 5 bp drop to 0.72%. Reports from J&J and Eli Lilly regarding delays in progress on COVID vaccines and treatments reminded investors that the road to “normal” is bumpy. This leaves Pfizer and Moderna as the only two major vaccine candidates to have any chance at approval by year end. These developments remind us that regarding commercial real estate, any return to pre-pandemic normality will be well into 2021 and many changes may be permanent. A recent analysis by Cushman and Wakefield predict an increasing of office vacancies well into 2022 with a return to pre-COVID levels being achieved in 2025. The work-from-home movement has been accelerated by COVID: permanent at home workers increased from 5-6% pre-COVID to 10-11% today. The “hybrid” worker is on the rise. Pre-COVID hybrids accounted for 35% of office workers. Today this number is 50%. The hybrid worker splits working time between the office and home.
Another major trend is affecting the real estate mantra “location, location, location”. The pre-pandemic location trend was driven by urbanization and densification around downtown cores of major cites. As mentioned by Peter Grant in today’s WSJ, the urbanization trend is being reversed. Downtown offices and attractions are less alluring to residents today. This has led to a flight to the suburbs and other secondary locations, as residents seek more space. This is not expected to “snap back” with the availably of a vaccine. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
October 7, 2020
The “must pass” stimulus has been rocked by conflicting messages as markets plunged yesterday on “no deal until after the election” talk followed by some optimism today. The familiar pattern played out this week. Federal Reserve bankers pleading with Congress that their monetary policy only goes so far and that fiscal policy is desperately needed. The bankers indicated that the June-July bounce back in hiring was “low hanging fruit” and that the remaining job losses may be long term or permanent. Disney, Regal Cinema and the airlines announce major job cuts in the last few weeks. It seems that the private sector is not ready to create jobs without assistance. The next week or two should be interesting.
Treasuries & Rates: After sitting in a tight range of about 0.65% for weeks, the 10 year T is at 0.78% today, a 4-month high. Why? Disappointment over the Fed’s September meeting minutes. As record deficits create huge supplies of treasuries, there has been some hiccups in long bond purchase volume. The Fed was expected to announce “yield curve control” measures soon, promising to keep 10 and 30 year rates within a desired range by purchasing enough treasuries to push the yield low enough. The minutes today showed that as of now, this is not the policy. So some selling occurred on that announcement and on today’s muted optimism for a stimulus deal. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
September 30, 2020
Congressional and Administration officials are trying one last time to pass a stimulus bill before the pre-election recess. American Airlines announced 19,000 furloughs today which will be reversed only if new aid from Washington is forthcoming. Other major airlines (United & Delta) are expected to follow suit, and these layoffs will have a ripple effect throughout the economy. Many analysts are pointing to statistics that indicate the recovery from the 2008 Great Recession was slowed by the lack of continued stimulus. A large bill was passed in early 2009, but follow-ups were doomed by partisan wrangling. San Francisco Federal Reserve President Mary Daly today called for stronger fiscal policy from Congress: “We aren’t out of the woods yet, so we need a longer bridge”. She also said that there is weakness in the jobs market that the unemployment rate is not capturing.
Spotlight on Hotels: The hotel sector has been hardest hit by the pandemic. Recent weeks have seen permanent closures of high-profile hotels such as, The Luxe on Rodeo Drive in Beverly Hills and the “Crossroads of the World” Hilton on Times Square. Experts indicate that without significant aid from Congress the wave of closures is just beginning. CMBS has been the preferred loan execution for hotels for many years with $85 billion in outstanding hotel loans. Statistics from Trepp, the leading CMBS analytics group, indicate unprecedented stress on the sector. Loans delinquency are at 23.4%, highest on record (December 2019 it was 1.3%). The volume of delinquent loans exceeds the highest level reached during the Great Recession by 53%. Over 35% of CMBS loans are on servicer “watchlist” with 24% in special servicing now. The hardest hit MSA’s are New York/Newark, Houston, Chicago, Dallas, LA, Atlanta. All these metros were major convention and business travel hubs. There are some bright spots in the industry as many desirable drive-to destinations are experiencing high occupancy. Travelers are getting comfortable with procedures such as contactless entry, intense cleaning procedures, etc. It is apparent that a return to “normal” levels of air travel and business meetings will be dependent on the widespread distribution of an effective vaccine. This is estimated to occur in mid-2021 at best, so Congress must act or the industry will see waves of foreclosures over the next several months. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
September 23, 2020
One of the October 1 “cliffs” is solved as an approved continuing resolution is on its way to being approved, keeping the Government open until mid-December’s “lame duck” session. As partisanship battles flare and with no serious negotiations underway, prospects for another round of stimulus are fading. As Fed Chair Powell and Treasury Secretary Mnuchin appeared before Congress this week, Powell reminded legislatures that he does not have “spending power” and fiscal policy is their responsibility. The usual “needs list” was discussed by lawmakers: reallocations of unused Cares Act funds, money to schools, more PPP aid to hard hit industries (travel, restaurants, etc). Mnuchin even discussed PPP funding to help landlords make mortgage payments and/or make up for lost rent payments due to the pandemic. Economic bright spots include a rebound in household spending, brisk home sales, increased home mortgage application volume and manufacturing picked up to a 20 month high.
Loan Rates: The 10 year treasury has been trading in a very tight range for weeks (today at 0.67%), securitized loan markets are rallying and spreads are tightening. This continuing “perfect storm” is resulting in 10 year loan rates for agencies and CMBS around 3.00% with some loans pricing in the 2’s. Unless rates go negative, its hard to imagine coupons any lower. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
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