As recently as early this year, the June Fed meeting was pegged as the “liftoff”, ie the first rate increase in nearly a decade. Today saw the Fed continue to prepare investors for a rate increase sometime this year, most likely September (Yellen said rhetorically “whether it is September or December or March” seemingly taking a July increase off the table). Other takeaways from the statement and subsequent press conference by Fed Chair Yellen: (1) The Fed will not be deterred in their rate increases by “market tantrums”, ie the raises will be data driven; (2) Yellen does not appreciate IMF head Christine Lagarde dictating when The Fed should raise rates (Lagarde said wait until 2016); (3) She believes that consumer spending has rebounded from the winter slump, she’s not convinced that consumers are permanently more cautious since the financial crisis (important point in our consumer driven economy); (4) The 2004-2006 pattern of quarter point hikes at every meeting will NOT be followed, most likely a quarter point every OTHER meeting, meaning we are a long way from the “normalization target” rate of about 3.5%, which won’t be reached until after 2017 at that pace…. Treasuries rallied immediately after the news, with the 10 year T yield dropping from 2.39% to 2.31% in about an hour. CMBS/Credit spreads – Last week CMBS AAA bonds widened about 5-7 bps (from approx. Swap + 87 to 92). As one CMBS originator remarked, “Greece is the word”. The June 30 Greek deadline to negotiate new terms is looking very tight. Last week’s rumored “near agreement” has degenerated into some very confrontational rhetoric. Bond yields are “adjusting” with Spanish and Italian yields now higher than the US (it was surprising that it took this long). Credit spreads are widening on the uncertainty, but not as much as the major disruptions of 2010-2011. More remarks on CMBS – Pool sizes are smaller as originators want to increase velocity and not hold product too long” and “This feels like August already” (aka “Hamptons effect” the traditional slow period which sometimes sees spread widening as big market players vacation). ……stay tuned…. David R. Pascale, Jr.
