Treasury Yields Fall, Spreads Widen, as Markets Weigh Global Risk, Inflation, Fed

The Ukraine conflict and subsequent sanctions are roiling financial markets. The exclusion of Russian banks from the SWIFT global payment system triggered a flight to quality as investors bought treasuries and sold off risk assets. The 10 year T is at 1.73%, down from 2.03% last week, pre-invasion. Markets are now betting that the US Federal Reserve’s rate to increase plans for 2022 may be slower than previously anticipated. Example – the probability of a half-point rate increase this month has almost vanished. A quarter point increase is fully “baked in”. Speaking of Fed and inflation, last week’s PCE core inflation index (the Fed’s preferred metric) jumped 5.2%, a new 38 year high. Today, oil prices (West Texas Intermediate) closed at $105 a barrel, the highest since August 2014. The coordinated release of 60 million barrels of oil from the US and other world powers today did not help prices (note: that is about a half day’s worth of global consumption). The SWIFT exclusion makes it difficult for Russian oil to be sold, not to mention Russia’s standing as an international pariah. Supply chain issues are also being exacerbated. Fed Chair Powell speaks to Congress tomorrow and will try to balance inflation hawkishness with sensitivity to market disruptions. Many lenders are cautiously quoting new loans but we are hearing that it’s “difficult to know how to price right now”. CMBS spreads have increased about 40 bps in the last few weeks (AAAs up from the 60s to the 100s over Swaps). CLO (floating rate) spreads were already gapping out early in the year due to the LIBOR-SOFR transition, but now have widened further. The question is, will this all “settle down” or escalate? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners