In-depth report
Jobs, tapering driving markets and rates
Jobs and tapering are the key elements driving the markets right now.
All eyes will be on Friday’s employment report, which will definitely impact the markets. If employment numbers are strong, this will lead to higher Treasury numbers.
There’s been some volatility in the Treasury market. The last two weeks trading range has been from a low of 1.3 percent, to about 1.54, so up almost 25 basis points.
“I expect to see a slow upward trend,” observes Thirty Capital Analyst Bryan Kern. “I’m expecting the range to be around 1.60 or maybe even as high as 1.65 for the next two weeks.”
Bryan reminds listeners that tapering is expected to begin next month.
On the one-month BSBY and one-month term SOFR, both are trading at around six basis points. One-month LIBOR continues to trade a couple of basis points higher, close to eight basis points.
Analyst Jay Saunders says rates will likely remain where they are until the Fed is through with its tapering. He notes that a single Fed rate increase is predicted for next year, 2022, with two increases anticipated for 2023.
Jay says even with inflation, the short end of the curve is not moving upwards at all. He advises that if borrowers have caps or shorter-term hedges, watch them very closely.
The CMBS-CLO market is as hot as ever, Analyst Jeff Lee reports.
“We are in that 45 to 60-day window now, before year end, when a securitization starts” he explains, adding that good pricing is available.
“A lot of lenders I've spoken with say even though there's maybe 30 CMBS players right now in the industry, it feels just like five or six years ago, when we had, what, 50, 55, 60 super competitive players.”
Analyst Jason Kelley notes that President Joe Biden has signed a temporary stop-gap bill for the debt limit, which buys them another nine weeks.
What happens to your loan when LIBOR goes away?
Listeners have been contacting Thirty Capital CEO Rob Finlay with questions about how to handle loans now that LIBOR is going away.
“This is the first time borrowers have had to really think about what their index is, since the late 90s and early 2000s,” explains Rob.
Rob says that some borrowers say lenders have communicated with them, indicating that their loans will automatically convert to SOFR.
What the borrowers want to know is should they actively push for SOFR now as their index, given that SOFR rates are lower than LIBOR?
Can I go to SOFR right now?
Rob points out that borrowers are being told by lenders which replacement index they will be moved to when coming off LIBOR.
However, Jay says his understanding is that lenders can’t go from LIBOR to SOFR. They will go from LIBOR to SOFR, plus a spread.
Says Jay: “If a borrower has a loan that goes from LIBOR to SOFR then you’ve got yourself a good deal, because SOFR will always yield lower than LIBOR.”
Jay adds that the ARRC recommends spread adjustment in the transition from LIBOR to SOFR. All language the analysts have seen to-date indicates a spread adjustment is recommended.
On the technicalities, Jay explains that banks are still originating loans in LIBOR, which is surprising given that LIBOR ends Dec. 31, 2021.
For borrowers who have a line of credit in LIBOR, you can still draw on that credit. But new loans cannot originate based on LIBOR.
Even so, LIBOR will continue to be quoted by the banks that quote it from now until June 30, 2023. This gives borrowers a window to transfer loans.
Jay stresses borrowers must know what their fallback is. When LIBOR goes away, what do you go to? You should know your LIBOR fallback right now, or very soon!
Rob and Jay explore this issue in our in-depth episode. Listen to the full episode for the full analysis and more!
