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CRE borrowers must look out for rising cap prices as market volatility continues
The Fed is expected to raise interest rates by a quarter of a basis points (bsp) this week.
The futures market is actually expecting about 165 basis points and tightening in 2022. So there are many who think the Fed will go for a .50 bps increase, but Thirty Capital Analyst Bryan Kern says the consensus around .25 is probably right.
For commercial real estate borrowers, this means more of the same, with high volatility and thinner markets, says Bryan.
Commercial real estate borrowers must watch out for cap prices!If you are in the market for hedging products, get regular updates on cap prices, because they are going up due to market volatility.
Says Thirty Capital Analyst Jay Saunders: "We have a client who did not execute a cap Friday. It's $10,000 more expensive today than it was Friday."
He warns borrowers to really think about strike rates on these gaps. "I know borrowers want leverage. They want low strike rates so they can lever up these projects.
"But when three-year, two-percent caps cost 65 to 70 basis points per annum you've got to start thinking about the math . . . where (the numbers) do and don't make sense."
Watch out for intraday movement on the marketsTo add to Jay's warning, Bryan cautioned commercial real estate borrowers to be vigilant for intraday movement. On interest rate caps there can be a swing between 16 and 17 bps in a matter of minutes.
COVID spike could impact supply chainJay points to the news out of China that COVID cases are at a new high since the outbreak just over two years ago. Jay asks if this is going to be a body blow to international supply chains, and just how much it will impact business in the U.S.
What's happening with short-term loans?LIBOR legislation has passed in Congress. This allows allowing Federal calculation agents to force a transition from LIBOR to the preferred fall-back, which would be either one- or three-month term SOFR rate for contracts that don't have workable fall-back language. The AARC is likely done with the transition now that this legislation has passed.
BSBY is still lagging behind the SOFR and LIBOR, coming in at about 32 bps for LIBOR's 43, notes Jay. So LIBOR has obviously priced in the Fed increase coming on Wednesday.
Jay notes that the curve continues to flatten, and he believes that "Clearly the market anticipates the Fed plowing forward with its rate increases.
Market tries to anticipate Fed behavior"But the market also seems to be anticipating a very 2019-esque overdoing by the Fed, to be followed by Fed rate cuts within the next couple of years.
After this month's increase, the next Fed meeting is in May, and rate cuts are expected for the next six meetings, although Thirty Capital believes the Fed may get derailed on those plans.
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By Thirty Capital LLCThe Fed is expected to raise interest rates by a quarter of a basis points (bsp) this week.
The futures market is actually expecting about 165 basis points and tightening in 2022. So there are many who think the Fed will go for a .50 bps increase, but Thirty Capital Analyst Bryan Kern says the consensus around .25 is probably right.
For commercial real estate borrowers, this means more of the same, with high volatility and thinner markets, says Bryan.
Commercial real estate borrowers must watch out for cap prices!If you are in the market for hedging products, get regular updates on cap prices, because they are going up due to market volatility.
Says Thirty Capital Analyst Jay Saunders: "We have a client who did not execute a cap Friday. It's $10,000 more expensive today than it was Friday."
He warns borrowers to really think about strike rates on these gaps. "I know borrowers want leverage. They want low strike rates so they can lever up these projects.
"But when three-year, two-percent caps cost 65 to 70 basis points per annum you've got to start thinking about the math . . . where (the numbers) do and don't make sense."
Watch out for intraday movement on the marketsTo add to Jay's warning, Bryan cautioned commercial real estate borrowers to be vigilant for intraday movement. On interest rate caps there can be a swing between 16 and 17 bps in a matter of minutes.
COVID spike could impact supply chainJay points to the news out of China that COVID cases are at a new high since the outbreak just over two years ago. Jay asks if this is going to be a body blow to international supply chains, and just how much it will impact business in the U.S.
What's happening with short-term loans?LIBOR legislation has passed in Congress. This allows allowing Federal calculation agents to force a transition from LIBOR to the preferred fall-back, which would be either one- or three-month term SOFR rate for contracts that don't have workable fall-back language. The AARC is likely done with the transition now that this legislation has passed.
BSBY is still lagging behind the SOFR and LIBOR, coming in at about 32 bps for LIBOR's 43, notes Jay. So LIBOR has obviously priced in the Fed increase coming on Wednesday.
Jay notes that the curve continues to flatten, and he believes that "Clearly the market anticipates the Fed plowing forward with its rate increases.
Market tries to anticipate Fed behavior"But the market also seems to be anticipating a very 2019-esque overdoing by the Fed, to be followed by Fed rate cuts within the next couple of years.
After this month's increase, the next Fed meeting is in May, and rate cuts are expected for the next six meetings, although Thirty Capital believes the Fed may get derailed on those plans.