Treasury Yields Rally, New Auction Demand is High, CMBS Rallies Further in “Split” Market

Today’s sale of $23 billion of 10 year notes attracted record demand from “Indirect Bidders” which includes foreign central banks. This development was interesting on a day when oil prices jumped 3%; with most types of crude settling above $45 a barrel. The 10 year T hit a low of 1.71% today. The flight to quality was due to: (1) Concerns about consumer spending, a major component of US growth since the crash (retail stocks took a beating as Disney and Macy’s reported disappointing earnings); (2) Higher oil prices that will lead to higher gas prices – further eroding consumer buying power; (3) International:  The possibility of a “Brexit” (a British exit from the European Union), with the election just 6 weeks away. This will be uncharted territory and potentially disruptive as the US Fed and IMF see this as the biggest threat to the global economy. Regarding the Fed, the markets seem to be pricing in only one rate increase this year as wage inflation continues to be stagnant – CMBS: Bond buyers are increasingly looking at “branding” pools by originator. An “all-bank” pool priced at the best spread since October 2015 with AAA’s at T+117, while a “non-bank pool” priced at T+130. New full leverage 10 year loans are being originated at spreads as low as T+270, putting the all-in coupons in the 4.50% range.   stay tuned 

David R. Pascale, Jr.