Capital Markets Update Week of 7/23
July 23, 2024
Private-Label CMBS and CRE CLOs
One CMBS transaction priced last week:
- WFCM 2024-5C1, a $731.9 million conduit backed by 32 five-year loans from Wells Fargo and six other contributors
According to Commercial Mortgage Alert, nine additional offerings totaling ~$8 billion are currently in various stages of marketing, including a $1 billion CRE CLO from Prime Finance.
Year-to-date private-label CMBS and CRE CLO issuance totaled $50.8 billion, well ahead of the $21.7 billion for the same period last year.
Spreads Largely Unchanged
- Conduit AAA and A-S spreads were unchanged at +100 and +140. YTD, AAA and A-S spreads are tighter by 16 bps and 25 bps, respectively.
- Conduit AA spreads were wider by 20 bps at +170, while A spreads were unchanged at +220. YTD AA and A spreads are tighter by 55 bps and 155 bps, respectively.
- Conduit BBB- spreads were unchanged at +575. YTD, BBB- spreads have tightened by 325 bps.
- SASB AAA spreads were unchanged at +150 to +158, depending on property type. They have narrowed from +160 to +188 at the start of the year.
- CRE CLO AAA spreads were unchanged at +170 / +175 (Static / Managed). BBB- spreads were also unchanged at +575 / +575 (Static / Managed).
Agency CMBS
- By the numbers: Agency issuance totaled $2.5 billion last week, consisting of $1.3 billion in Fannie DUS, $861.2 billion in Freddie K and Multi-PC transactions, and $301.7 million in Ginnie transactions.
- Year-to-date agency issuance totals $54.6 billion, 16% lower than the $65.2 billion for same-period 2023.
The Economy, the Fed, and Rates…
Economic Data
- Initial jobless claims increased by 20,000 to 243,000 for the week ended July 13 – the highest level since early May – indicating a softening labor market. Continuing claims also rose, reaching 1.87 million, the highest since November 2021. The unemployment rate stands at 4.1%, up from 3.6% a year ago.
- Retail sales excluding autos rose by 0.4% in June, the highest in three months. Control-group sales, which exclude food services, auto dealers, building materials, and gasoline stations, advanced by 0.9%, matching the largest increase since April 2023. Both measures indicate a resilient consumer despite today’s elevated interest rates.
- New home construction increased by 3% in June to a 1.35 million annualized rate, driven by a 19.6% surge in multifamily construction. Single-family housing starts fell to an eight-month low, reflecting continued challenges in that market due to high rates and elevated construction costs.
- Industrial production posted back-to-back gains for the first time since 2021, with a 0.6% increase in June and a revised 0.9% gain in May. Factory output increased 0.4%, with gains in autos, electrical equipment, appliances, and nondurable goods.
- The second-quarter GDP report, expected on July 25, is forecasted to show an annualized growth rate of 1.8%. While that would be a slight pick-up from the first-quarter rate of 1.4%, it would be below the rapid growth seen at the end of last year.
Fed Policy
- Fed officials have signaled that rate cuts are "getting closer," with a possible cut in September, depending on upcoming economic data. The central bank faces a delicate balancing act. Cutting rates too soon could risk reigniting inflation, while waiting too long could exacerbate economic slowdown and rising unemployment.
- Yes, but: With inflation trending down and the labor market cooling, some Fed officials believe a rate cut is warranted sooner rather than later to avoid further economic slowdown. Historical data show that once unemployment starts rising, it tends to continue increasing, which supports the case for preemptive rate cuts. Investors already see a rate cut in September as a near certainty and are pricing in two or three quarter-point cuts this year.
- The upcoming presidential election adds another layer of complexity to the Fed’s calculus. Donald Trump issued a stark warning last week to the Fed not to cut its policy rate before the election, saying in an interview with Bloomberg that it was “something that they know they shouldn’t be doing.” Fed officials emphasized their commitment to data dependency and policy decisions independent of political influence.
Treasury Yields
- The 2-year Treasury yield rose by 6 bps to 4.51% over the past week, reversing a three-week streak of falling yields. The 10-year Treasury yield also increased by 6 bps on the week to 4.24%, ending a two-week streak of falling yields.
- A "steepener" trade has gained popularity among hedge funds, betting on short-term yields to fall faster than long-term yields, with the growing prospect of Donald Trump winning the presidential election. Investors have been putting on positions in anticipation that the former president’s tax-cutting and pro-trade tariff agenda could eventually lead to higher inflation and a greater supply of longer-dated government bonds.
- The bottom line: Since the presidential debate on June 27, the steepener trade has paid off, with the 2-year yield falling by roughly double the drop in the 10-year (prices move inversely to yields).
You can download CREFC’s one-page MarketWatch with statistics covering the economy and the CRE debt capital markets here.
Contact Raj Aidasani (raidasani@crefc.org) with any questions.