This week has seen huge market turmoil in worldwide equity, currency, bond and credit markets. The risk off trade is front and center. What is going on? Will this be a great re-pricing of assets? Worldwide central banks have injected massive liquidity into the system in the hopes of spurring inflation of commodities, overall economic growth, lowering unemployment and raising wages. But the results have been massive inflation of financial assets (stocks, government bonds, corporate bonds, derivatives, etc), along with wage stagnation, sputtering inconsistent growth, and commodity deflation. Is this part of the new normal? The plan was that the Fed could slowly raise rates and a handoff would occur whereby the economy would grow on its own. Instead, as we near the inevitable (?) rise in rates, markets are now repricing these assets and the process is sudden and precipitous. The 10 year Treasury whipsawed from 2.20%, down to 1.94% and back up to 2.20% in the past 12 days. What will the Fed do now? NY Fed President Dudley’s highly watched speech today soothed markets as he indicated that the case for the expected September rate rise is less compelling. However, some believe the Fed needs to stick to their guns and show that the Fed is not a slave to the market. CMBS/Credit Spreads: CMBS lenders are still quoting, locking and closing however there is a great deal of uncertainty in the market. No pools are coming to market until after Labor Day (typical for late August). But the late Labor Day this year (Sept 7) leaves just 3 weeks for the market to digest about $12 billion in securitizations. New quotes for full leverage 10 year loans range from Swaps + 210 to 250 with originators indicating that we will see where the market is when it’s time to close….stay tuned… David R. Pascale, Jr.
