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Pascale’s Perspective

  • Market Volatility Whipsaws Treasury Yields

    Pascale’s Perspective

    July 21, 2021

    Stock markets plunged along with Treasury yields on Monday before rebounding yesterday and into today. The 10 year T dropped to 1.14% from 1.30% on Monday as concerns mount about rising Covid cases. The “June narrative” whereby a highly vaccinated society reopens and economic activity booms accordingly is being replaced by concerns about the highly contagious Delta variant. The recovery may be volatile and asymmetrical among regions and sectors. Interestingly, when the 10 year T hit 1.14% on Monday, it was in the middle of the pandemic low (0.50%, July 2020) and high (1.77%, March 2021). For now, inflation fears seem to be ebbing. The next 2-3 months will be fascinating as the “base effects” subside, supply chains return to near normal, and CPI/PCE statistics start to increasingly matter to markets. Next week’s Fed meeting may be the last meeting that Fed officials can claim price increases are “transitory”. Also next week: CPI, core CPI, and PCE announcements. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates Drop as Recovery Expectations Settle, Bund Plunges

    Today’s 10 year Treasury actually dropped to 1.28% as the 2nd half of 2021 gets underway. Many industry analysts predicted a 2.00% 10 year Treasury by year end 2021, spurred by robust economic growth coming out of the pandemic. However, the 10 year has been dropping in recent weeks, while very short term Treasury yields are rising slightly. This flattening of the curve usually signals lower growth expectations. The dip in yields may be a perfect storm of multiple factors; (1) Technical short covering of traders covering “bad bets” on treasury yields spiking; (2) Realization that the recovery may be uneven, an estimated 80% of all the stimulus has been spent and the effects may be dwindling; (3) Employment – last month’s new jobs number of 850,000 new hires is impressive, but it will take over a year at that rate to reach pre-pandemic job levels, traders feel the Fed will keep priming the pump until that goal is within sight, even at the risk of running “hot” inflation; (4) Relative value trade, the 10 year German Bund dropped to negative 0.30% after almost breaking above zero in recent weeks, so the US 10 year T at 1.30% is a good alternative.

    What are we telling borrowers? Today is a great time to lock in 10 year fixed rates. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Inflation Fears Subside and Slow Growth Expectations Depress Treasury Yields

    Pascale’s Perspective

    June 30, 2021

    Last Friday’s “blockbuster” Personal Consumption Expenditures Report indicated the highest price increases since 1992. May 2021 prices increased 3.9% (overall) and 3.4% (core). The bond market barely shrugged, the 10 year jumped about 3 bps that day, hitting 1.53%. Today the 10 year is at 1.46%. The markets are increasing believing that inflation is transitory. The May, June and July numbers will be due to “base effects” of low numbers for 2020. The price increases are asymmetrical as certain sectors such as used cars, energy and transportation indices are up dramatically (remember that oil prices dramatically bottomed out in March-Sept 2020, before rising. Car prices are being overly effected by supply chain issues). Some commodity prices are dropping after hitting unsustainable peaks (lumber, copper, etc). Note that the 5 and 10 year Treasury “break even rates” (the difference between actual treasury yields and treasury inflation protected yields) is narrowing, another indicator of inflation expectations amongst investors. A major survey released last Friday showed consumer inflation expectations perceive the present price increases to be temporary. The depressed treasury yields could be an indication that economic growth is expected to sputter after this initial recovery. Also note that the infrastructure bill emerging from Washington will be smaller than earlier anticipated and is not being funded by massive new treasury debt (the compromise bill being discussed relies on unspent funds from other bills and increased IRS enforcement). This narrative fits in with recent statements by Fed officials who are more focused on full employment than price control . Remember that total employment (labor force) is still 8.5 million below pre-pandemic levels. So this Friday’s monthly employment report will be closely watched. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Long Term Treasury Yields Stay the Course In the Wake of Market Volatility

    Pascale’s Perspective

    June 23, 2021

    We saw market volatility in the wake of last Wednesday’s Fed Meeting. Markets were reacting to the perceived hawkishness of the Fed as possible rate hikes in 2023 or even 2022 were being discussed (note that previously the Fed had insisted the first rate hike would be in 2024). The Dow plunged last Thursday/Friday, before rallying on Monday morning. Yet, the 10 year treasury yield actually dropped during the week (no sell off), unlike the infamous 2014 “Taper Tantrum”. Why? First off, there was a sell off in short term treasuries (from 30 days to 2 years) with those yields rising, while long term yields (5 to 30 years) lowered. Markets sold off on the short term because those treasuries are more sensitive to Fed rate increases as the Fed Funds Rate is an overnight rate. Long term rates dropped as markets were anticipating a scenario whereby the Fed rate increase hampers economic growth (10-30 year treasury yields often fluctuate with growth expectations). The yield curve thereby flattened. Fed Chair Powell continued to assuage market fears this week in his congressional testimony. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation”. Today the 10 year closed at 1.49% down from last Wednesday’s 1.56%.


    Spotlight on Washington DC, news for commercial real estate: The Supreme Court ruled 7-2 today that the head of the FHFA can be replaced by the President without “cause”. President Biden is expected to name a replacement for Mark Calabria, the existing head of the FHFA. How does this affect commercial real estate? The FHFA has been the conservator of Fannie Mae and Freddie Mac since 2009. The FHFA was put in charge of the agencies in the wake of the Great Recession and the housing market crash. Since then the FHFA has instituted annual caps on multifamily loan originations by Fannie/Freddie. The caps for 2021 are $70 billion for each agency. Note that the agencies originate about 50% of total apartment permanent loan volume. Today’s news is significant as Calabria was a proponent of privatizing the agencies. That would remove the famous “implied Federal Government guaranty” for Fannie and Freddie bonds. That would result in an uncertain future for the agencies as the private sector may not actively trade Fannie and Freddie’s bonds at the spreads we see today. This would possibly increase borrowing costs for apartment owners. Fannie and Freddie apartment loan rates impact values and cap rates nationwide and interest rates amongst private lenders (banks, life companies, funds, etc). Calabria’s replacement is expected to continue the Federal Government’s involvement in the agencies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Indicates that “Peak Dovishness” Is Over

    Pascale’s Perspective

    June 16, 2021

    Today’s Federal Reserve meeting, statement and presser from Fed Chair Powell definitely showed the central bank starting to pivot away from the ultra-accommodative policies put in place last year The headline: 13 of the 18 Fed voting members believe the Fed will raise rates in 2023 (this number was 7 of 18 in March 2021), with 7 of them now predicting a 2022 rate increase (up from 4 in March 2021). Inflation hawkishness has been abundant in recent weeks. Statements from Lawrence Summers, Deutsche Bank, various CNBC commentators have accused the Fed of being overly sanguine in policy and rhetoric. Powell acknowledged this atmosphere: “inflation could turn out to be higher and more persistent than we anticipate”. He also prepared the markets for a decrease in monthly bond purchases (now $120 billion per month) by saying “this meeting, is the ‘talking about talking about’ meeting” which referenced his promise to telegraph any decreases in Fed bond buying in advance. Today the telegram was sent! Bond buying will taper probably by year end. This matters to commercial real estate because the Fed is affecting both the index (treasuries) and the spreads (Fannie/Freddie bonds) with these purchases. As these purchases slow, the private sector would have to make up the slack to keep rates low. Also, the Fed increased their headline inflation expectation to 3.4% (up a full point from March 2021). Powell sought to calm markets near the end of the presser. Perhaps he was watching the Dow crash 400 points on a CNBC monitor in the room? Again, he used the “t word” (Transitory) to describe inflation. As far as the projections for upcoming rate increases, he reminded everyone they are projections and should be taken with a “big grain of salt”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As Markets Wait for CPI

    Economists are expecting tomorrow’s CPI report to show a 4.7% increase from a year earlier. Today saw the 10 year treasury yield drop to as low as 1.47%, possibly due to technical short covering in the markets. The big question is – will tomorrow’s big number rattle Treasuries into a sell-off? Or, will the number be tamer than anticipated? Last week’s weaker than expected jobs report calmed market inflation expectations. Tomorrow’s report may rekindle inflation fears.

    Spotlight on Hospitality: During the depths of the pandemic shutdowns in 2020, the hotel industry was hit hard, many hotels were closed for business or operating at severely reduced capacity. The monthly occupancy rate plunged from 62% in February to a multi-decade low of 22% in April. Many market participants were anticipating a wave of distressed property acquisition opportunities in the sector stemming from lender foreclosures. The “wave of distress” did not occur. The pandemic shutdown was vastly different from the credit crisis and Great Recession that began in 2008. This time, vaccine distribution and the 2021 reopening of society was within sight. Most lenders allowed their borrowers to hold on through the crisis. Case in point: the largest distressed portfolio in the US, the Eagle Hospitality Trust included 15 hotels located across the country. The distress in the portfolio stemmed from ownership issues then exacerbated by the pandemic. The auction is going better than anticipated with 5 assets fetching prices in excess of the stalking horse bids and the remaining assets expected to be sold this month. According to STR, May 2021 US Hotel occupancy hit 61.8%. Memorial Day weekend occupancy was nearly 80%. CMBS Hotel loans in special servicing dropped to a pandemic era low of 20.1%, after hitting a high of 26% last summer. Last month’s jobs report indicated that Leisure and Hospitality led the net increases in jobs at 331,000 new hires (#2, Government was at 48,000). Business travel is showing signs of life and even pent up demand. This week, the first major convention post pandemic, the World of Concrete in Las Vegas is well attended. Corporate travel is starting up amongst companies looking to get an edge on their competitors still doing business remotely. Here at GSP we are seeing more capital sources now considering hotel loans albeit at lower proceeds and higher risk spreads, but it’s a start. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As “Taper Talk” Gets Closer

    This week saw a parade of Fed officials simultaneously calming markets on one hand while preparing for the inevitable reduction in monthly bond purchases. Prices have risen across a broad spectrum of commodities: lumber, steel, copper, aluminum, gasoline, corn, chickens and entry level wages. The officials, including SF Fed President Mary Daly and Vice Chair Richard Clarida are sticking to the view that the recent inflation is transitory. Issues regarding supply chain and labor market bottlenecks need to work themselves out. The thinking is that we need to see sustained inflation with normally functioning supply chains until a true assessment can be made. Only then will the Fed start “removing the punch bowl” in a measured and well telegraphed process. For now, its working as the 10 year T dropped to as low as 1.55% this week after hitting 1.70% in early May. But note that one prominent Fed official is “tolling the bell” as he said, “It’s time to start talking about tapering bond purchases.” Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Shades of the Taper Tantrum?

    Today’s release of the April Fed meeting notes quoted officials saying that “if the economy continued to make rapid progress it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”. That’s Fed speak for, “we are thinking about it but don’t worry yet”. Remember, the Fed’s path is the following: prepare markets for reduced monthly bond purchases (now $120B a month), actually reduce bond purchases, then start raising rates. This release is significant as it’s the first hint. Markets didn’t fully throw a tantrum today. The 10 year jumped from 1.62% to 1.69% this afternoon, settling at 1.67%.

    Focus on Retail

    The pandemic upended the retail sector hard but the comeback is happening. (But, not for all properties). Trends already in place were greatly accelerated by the pandemic: ecommerce, grocery delivery, and mega stores such as Target/Walmart acting as fulfillment centers for customers picking up or returning merchandise. Last year at this time, we saw shopping center owners dealing with closed tenants, some paying partial rent or no rent and requesting rent deferrals and/or abatements.

    The recent CBRE Q1 2021 US Retail report has some eye popping statistics. Total retail sales increased 14% year over year. Q1, March 2021 sales growth of 28% was the highest monthly year over year ever recorded by the US Census stat bureau. Consumer sentiment improved to its highest post-Covid level, total net absorption has been positive for 2 consecutive quarters. Demand is high for freestanding single tenant properties as drug stores, grocery stores and fast food have thrived during the pandemic. On the other hand, the road to obsolescence grows for many of America’s large shopping malls. TreppWire reported on a flurry of malls with CMBS loans being handed back to the lender/servicers. The Prizm Outlets Mall in Primm, NV has been liquidated at a great loss to the bondholders. Brookfield is cooperating in friendly foreclosures of the Florence Mall (Kentucky), Bayshore Mall (California) and the Pierre Bossier Mall in Louisiana. Interestingly, the Prizm and Florence properties were part of the infamous “CMBX 6” grouping of bonds. CMBS 6 is a traded index of CMBS bonds originated in 2012, which had a large percentage of malls that rushed to refi as the CMBS “2.0” era began after the Great Recession. Legendary investor Carl Icahn has netted billions of dollars in profits by shorting the CMBX 6, these losses add to his gains. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Blockbuster CPI Above Expectations, Fed Not Worried (Yet), Stock Markets Tumble

    Today’s CPI report was expected to indicate an annual increase of about 3.6%. The actual number at 4.2% is the highest annual increase since 2008. The monthly gain of 0.9% in core CPI was the highest since 1981. Stock markets sold off yesterday afternoon on nervous anticipation of the report and then sold off big today after the release. The Dow and S&P indices were both down around 2% today. Fed and Treasury officials referred to it as a “single data point” and labeled it as “transitory”. However, investors recall the runaway inflation of the late 70s and the consequences of the bitter pill of skyrocketing interest rates prescribed by the Fed in the early 1980s. The 10 year T sold off with the yield hitting 1.70%, 20 bps above last Friday’s opening of 1.50%. The next critical level is 1.77%, the post pandemic era high from late March. The CPI report showed some major price increases in certain sectors: 21% for used car and truck prices (10% in the last month alone), energy prices jumped 25%. Shelter (rent) was up 2.1% year over year. Many commodity prices hitting recent highs include: lumber, steel, copper, semiconductors, corn, poultry, etc. Meanwhile, there is “unbalanced employment” as shortages of workers are affecting industries that are re-hiring due to pent up demand. The Fed policy makers are touting the “base effects” of the inflation numbers that won’t play out until July/August (March-June 2020 numbers were crushed during the initial shutdowns). Issues such as inefficient supply chains, worker shortages stem from the sudden pandemic recovery for which there is no precedent. Still, every data point for the next few months will be endlessly analyzed for the answer: real or transitory? High rates or low rates? How will the cost of capital affect asset prices? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates Stay Put as Powell Doesn’t “Blink” As Economic Growth Surges

    Pascale’s Perspective

    April 28, 2021

    With stimulus, vaccinations, and reopening’s spurring rapid and robust economic growth, all eyes were on Fed Chair Powell today as he discussed this month’s Fed meeting. The top level announcements were expected: no change in the Fed Funds rate (now at zero since last March) and continued quantitative easing as the Fed is purchasing $120 billion a month of treasuries and MBS. The question was, would the Fed’s resolve to continue the ultra-accommodative policies soften? Would there be a hint at when the Fed would start to ease up on these measures, such as lowering the monthly bond purchases. Powell stood firm especially when discussing potential inflation. Invoking classic Fed-speak, he expects inflationary data that will appear in the next few months as “transitory”. He indicated that “upward pressure on prices” over the next few months will be due to temporary factors. These include supply chain bottlenecks stemming from the sudden reopening and “base effects” as the next few months will be compared to the lows of Spring 2020. He again avoided a “taper tantrum” (Treasury sell off) by insisting he is not announcing any plans to slow down the purchases. The question is, when will he? Some Fed watchers believe he will be forced to at the June meeting as growth and inflation data may start to pile up by then. Or possibly, he may feel the right setting and time is the annual Jackson Hole conference in August. The next CPI, core CPI, PCE and core PCE readings will be watched by markets and could spur volatility in Treasuries. Powell spoke of being affected by the large homeless settlement near the Federal Reserve in Washington, he also said he will be meeting with homeless Americans soon. Perhaps the gauge he is really watching is wage inflation, evidence that the economic recovery is reaching to all levels of the economy. The 10 year Treasury has been sitting in a tight range lately at about 1.60%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Powell 60 Minutes Appearance, Tame Inflation Report Keeps Yields in Check (for Now)

    Pascale’s Perspective

    April 14, 2021

    Fed Chair Powell’s appearance on 60 Minutes was well timed, 2 days before a highly watched CPI report. Markets continue to be hyper sensitive to signs of inflation. He struck a familiar theme during the interview as he laid out the conditions for the next rate increase. He reiterated that it will take more than a single monthly report of annual prices increasing above the Fed’s target of 2.0%. Powell gave a very specific answer: “(he would) like to see it on track to move moderately above 2% for some time. When we get that, that’s when we’ll raise rates.” He is well aware that the CPI and PCE figures for the upcoming months may skew above 2.0% due to the “base effect”. The annual increases are based on the 12 months since the depths of the pandemic shutdown last year.

    Yesterday’s CPI report provided a test for markets. The annual CPI rose 2.6% aided by a 9.1% in the price of gasoline. However, the core CPI (which strips out the volatile food and energy components) rose only 1.6%. The 10 year T actually went down as inflation fears subsided and markets focused on J&J vaccine issues. The Fed’s preferred inflation gauge, PCE, will be released on April 30. The 10 year Focus on SFR Prices. The Fed’s nonstop purchases of Mortgage Backed Securities is designed to keep rates down for home buyers. But it may be contributing to runaway asset inflation in the single family home market. Home prices were up 11.2% according to the latest S&P Case Shiller index, the largest rise in 15 years (now that’s real inflation!). This is crowding out many potential buyers. In addition, these buyers have further competition. Homebuilders are increasingly renting out homes and selling to funds. DR Horton built 124 homes in suburban Houston and sold the entire subdivision to a fund. Now foreign capital is targeting homes for rent. Some of Europe’s major insurance companies and pension funds are forming multi-billion dollar ventures to purchase new homes in bulk. They are focusing on sun-belt “move to” markets as young families opt for more space and rent homes. Apartments rents: March data from the’s survey of apartment rents rose for the first time since the beginning of the pandemic, a 1.1% increase since last month as secondary locations thrive. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Infrastructure Plans Fuel Treasury Yield Spike

    Pascale’s Perspective

    March 31, 2021

    Looking at the United States as a massive real estate asset is instructive. One could say that the American Society of Civil Engineers Report Card is our property condition report. The 2021 grade is “C-“ with special attention on public roadways, water systems, broadband capacity and the energy grid. A $2 trillion infrastructure plan is being discussed in Washington with uncertainty about how to pay for it. Bond markets are guessing that some increased deficit spending will be involved. The 10 year T bumped up to its recent high of 1.74%. The sell off in treasuries is largely based on the anticipation “inflation is coming, it has to be.” Last week’s PCE index (the Fed’s preferred inflation metric) came in at 1.3% annually. Other factors contributed such as fiscal year end selling of US Treasuries in Japan. The data: the next round of economic reports will tell the tale of the nascent recovery and may indicate signs of inflation. Last month’s reports were dragged down by the February storms that hit much of the country. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners