Fed Chair Powell’s testimony to Congress this week was more highly anticipated than usual. The big news for financial markets was his pledge for the Fed to purchase corporate bonds for individual companies. This is part of the unprecedented massive bond purchases by the Fed in the wake of the COVID crisis. Powell’s reason was also very interesting. Many noted that the corporate bond market is very liquid today with spreads almost back down to their pre-COVID levels. Part of this was due to the Fed’s promise to purchase corporates on March 23 during the worldwide panic. Powell stated that the Fed’s duty was to follow through on that promise and make the purchases. The takeaway is that the immense influence of the Federal Reserve is based on its integrity. As corporate bond spreads tighten, look for real estate credit spreads to follow suit in the fixed rate markets.
CLO Update: Collateralized Loan Obligations in the commercial real estate market are pools of floating rate loans sold in the secondary market. It’s a major underpinning of the bridge loan sector. It has been virtually shut down since early March as no bond buyers were active. Activity has started up again in the past few weeks as some pools of selected pre-COVID originated loans are being successfully securitized. Spreads are wider, for example: pre-COVID pricing for AAAs was approximately LIBOR + 100. Those bonds are now selling at about L + 235 with oversubscribed buyer interest. Look for bridge loan programs offering 80% LTC loans at L + 275-300 pre-COVID to now offer 60-70% LTC at L + 450 – 550. And the now familiar stratification of product types will be in effect: multifamily and industrial in favor, with office needing a good story, retail very selective and no hotels. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners