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Treasury Yields Fall, Supply Chain Issues Cloud Data, Hotel Financing Thaws

Yesterday’s testimony from Fed Chair Powell and Treasury Secretary Yellin included further assurances that ultra accommodative policies will continue. His most resonant comments were regarding the economic recovery which he described as “far from complete” and that sectors of the economy “remain weak”. He again reiterated his belief that the official unemployment rate undercounts actual joblessness. He pegs the actual rate is close to 10% (the official announcement this month was 6.2%). Fed Governor Lael Brainerd chimed in yesterday with a speech. She indicated that the Fed decisions will be results based and they need to see employment on solid ground before making any policy moves. Treasuries rallied on the patient messaging and also on a “flight to quality” amid worries of a “third wave” Covid resurgence in Europe (Germany and the Netherlands imposing new lockdowns). The 10 year T is at 1.61%, down 15 bps from last week’s high.

The February durable goods orders report indicated a 1.1% decrease after 9 consecutive months of gains. This is being blamed on supply chain issues combined with winter storm disruptions. The manufacturing sentiment remains very strong. The next few months of reports should be very telling as some level of normalcy returns. The blocking of the Suez Canal may be significant. 10% of the world’s trade runs through this key passage which now has a distressed cargo ship turned sideways.

As the lockdowns took hold last year, financing for hotel properties froze up across the board. As usual, CMBS is the bellwether to watch. The bridge/construction lenders and equity providers all need to underwrite to the permanent loan market. The general guidance from originators and rating agencies is as follows: take 2019 stabilized income, discount it by 20% and then size the loan to a 12-13% debt yield. It’s a start and hopefully as the anticipated pent up demand for travel ramps up, underwriting standards should improve from there. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners