The last few weeks have seen major volatility in financial markets with stock market selloffs, climbing VIX index, oil price swings, and whipsawing bond yields. The 10 year yield marched up to 2.95% last Monday before dropping to 2.73% yesterday morning. Global slowdown fears tied to the Ukraine war, Chinese demand ebbing due to Covid breakouts/shutdowns in key Chinese cities, interest rate spikes, consumer confidence drops due to inflation are all contributing to uncertainty. The yield curve has been inverting, steepening and partially inverting over the past few months. Today the 10 year is at 2.83%.
This week, all eyes will be on the release of the March PCE report on Friday. Markets will be looking for indications that inflation has peaked – hoping that the monthly increases in PCE and core PCE are below the February numbers. The prospect of “stagflation” is a major “fear factor” (stubborn inflation, high interest rates, stagnant economic growth). The Fed meeting and commentary next week seemingly has been telegraphed and received by markets – a 50 basis point increase is expected (futures markets show 97% probability).
Note that markets now expect three consecutive 50 basis point increases (May, June, July). Signs that inflation is peaking and possibly decreasing in the coming months may temper these hawkish expectations. Term SOFR rates (floating rate lenders’ preferred loan index) have increased from about 0.21% (March 1) to 0.70 (today). New fixed rate CMBS loans are pricing at about 4.80-5.25%. Banks winning loans as they are able to compete with lower rates and simple rate locks. Bank loan proceeds may be slightly less and involve some level of recourse. Fannie and Freddie are locking rates anywhere from the mid to upper 4’s depending on leverage and affordability metrics. Life companies are able to lock rate early and price in the 4.50-4.75% range for higher quality properties, especially apartments and industrial. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
