Today’s Fed statement and subsequent Yellin press conference notes: “Normalization” is closer and replaced the key “considerable time” reference to how long rates will remain at virtually zero (since December 2008). The language now indicates the Fed will be patient, but the message is to look for rates to rise in mid-2015, noting that normalization (rate increases) would start after a “couple” of meetings, and further defined a couple as “two”. However, the “dots” that indicate predictions show a consensus rate of 1.125% by YE 2015, down from 1.25%, notably less than the full 1% rate hike predicted for 2015. Also noteworthy was the language regarding employment; “underutilization continues to diminish” indicating that the closely watched “slack” in the labor market was tightening, further clearing the way for rate hikes. Treasuries sold off after the Fed statement with the 10 year closing at 2.14%, after hitting lows of 2.05% over the last week on global slowdown fears (China, Europe, etc). Credit Spreads: CMBS spreads “gapped out” 10-15 bps in the last week. Why? (1) Credit spreads across the board are widening due to a major sell-off in high yield bonds (aka “junk” bonds). A large share of high yield bonds are tied to companies in the energy sector, plunging oil prices are causing those spreads to spike and the other credit spreads (corporate, CMBS, etc) are widening. (2) Russia’s currency crisis (also tied to energy among other factors) and last week’s largest rate rise since 1998 spurred a currency panic, bringing back memories of 1998’s Russian debt crisis which caused a major disruption in CMBS. Some things are different now, such as the hedging mechanisms used by CMBS issuers (back then they shorted Treasuries), but the uncertainty is causing prices to fall and spreads to widen. (3) Last week’s news that regulators may require S&P pull out of the CMBS rating market adds more uncertainty, especially in the single borrower (large) securitization market. Other agencies (Fitch, Moody’s, etc.) have different risk models, etc. …Stay Tuned… David R. Pascale, Jr.
