Volatility in Treasury and Credit Markets

Uncertainty is the rule of the day: Disappointing earnings (IBM, etc), Chinese market and currency fluctuations, oil and other commodity prices plummeting on low global demand (feeding concerns about slowing growth). The mood is ‘risk off’ in the markets, the 10 year Treasury yield hit a low today of 1.98% on the ‘safe haven’ trade. Silver linings: Maybe oil is bottoming? China has trillions in reserves to prop up its currency and markets for a long time. Fed watch: The volatility and deflationary aspects of the oil plunge probably indicate that the Fed’s announced ‘4 raises in 2016’ guidance will most likely be 1 or 2 raises, with the next one now expected in September 2016. A March raise seems to be an unlikely possibility. CMBS: Fixed income bonds across the board are being hit with price cuts and spread widening. Unrated junk bonds and European corporates are being hit hard. The very first CMBS pools of 2016 are in the market and the price talk for the AAA tranche is in the T + 140-150 range (compared to T + 120s in October/November). Originators are having a tough time with few data points and new 2016 regulatory challenges from Dodd Frank legislation. Today, a typical full leverage 10 year loan is pricing in the 4.90% to 5.00% range… stay tuned… David R. Pacale, Jr.