The Fed has finally mentioned tapering, so it looks as though it will begin by year-end.

In the last week, from Sept. 20 to today, Sept. 27, rates are up about 20 basis points.

Rates this week will likely be volatile, says Analyst Bryan Kern, because key figures will be released, starting with consumer confidence numbers tomorrow, Sept. 28. GDP and core PCE are released on Thursday, and then PCE deflator on Friday.

Analyst Jay Saunders says the anticipated increase in short-term rates has moved forward a bit. He discusses expected rate increases going forward. Jay also presents current rates, including the one-month LIBOR, SOFR and BSBY rates.

Currently BSBY is trading at a lower rate that SOFR, and Jay says he’s not sure what’s driving that.

For Analyst Jeff Lee in defeasance, there’s a lot of end-of-month activity as his team prepares for the fourth quarter. Next week Jeff will have August data for his industry sector.

The debt ceiling is still looming, notes Analyst Jason Kelley. Experts are looking to see its effect on the overall market if terms aren’t agreed upon.

The market is anticipating December will be the time tapering begins, so there will be movement in rates around that time. The question is, how fast? Analyst Bryan Kern is revising down from his earlier 2% projection to the 1.75% range. Expect some rate volatility if tapering does begin as expected.

Analyst Jason Kelley describes the conversation and commentary around the debt ceiling as politics.

“The Democrats have their $3.5 trillion spending bill but the Republicans don't want to really support it. So they are saying they are not going to approve the debt ceiling, so you can pass whatever you want, but you're not going to have any money to pay for it.”

Jason says observers have to wait and see how it plays out, adding that it’s why the market is seeing such a high amount of cash in the repo market. 

Jason and Thirty Capital CEO Rob Finlay dig into this issue in detail during their discussion and explore what this means for the commercial real estate investors and the larger economy.

Rob and the team explore how the economy’s performance is impacting the commercial real estate market.

Bryan explains the economy is seeing some strong growth, but the huge disparity between jobs wanted and jobs needed is concerning. 

“Once the Delta variant spike calms down and this whole year is in the rear-view mirror, we’ll see those align a little better,” explains Bryan. “We will see some of those gains that the market has been waiting for in the next few months, hopefully.”

The markets are keeping an eye on President Joe Biden’s tax plan. He wants it to be retroactive to Jan. 1 2021, whereas the House Bill will make it retroactive to Sept. 13. For people taking capital gains and hoping the president’s tax plan doesn’t go through as is, it will be interesting to see what it does to the real estate market if it goes through. 

Rob and the team of analysts discuss defeasance in depth and explore what it means for borrowers. 

“If you look at all of the deals that you all are doing on the defeasance side, people are understanding that a bigger penalty sucks right now. And you think it does but it’s actually really a better thing. You're, you're basically swapping out for lower cost capital for longer. I know it’s hard . . .  everybody struggles with this calculation and, at the end of the day, it is a calculation.”

Rob likes the CMBS market right now, and says that there is so much demand for returns right now that CMBS and CLOs are going to be great for lenders.”

Beginning Jan. 1, 2022, banks cannot originate products in LIBOR. Rob and his team explore this, the fall-back language, borrowing, liquidity, and indices in depth. 

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Ten-year Treasury: Range-bound last week 1.28 - 1.38. Will likely continue this way until news on tapering begins. Also, a dozen central banks are meeting this week.

Short-term Rates: LIBOR is continuing to trade around eight basis points. One-month SOFR is slightly lower than one month LIBOR, trading at 5.¾ basis points. BSBY (the only credit-sensitive rate with any liquidity in the market) is trading on top of Term SOFR, at six basis points. 

Looking at where these indices would swap to, for clients looking to hedge exposure to floating rate, one-month LIBOR and BSBY are trading right on top of each other at about 83 basis points for a five-year swap. SOFR swaps in the five-year sector are trading around 71 basis points, which is about 10 to 12 basis points lower than the new credit- sensitive rates.

CMBS and CLO Markets: Strong volume coming up towards the end of Q3 and Q4. The big part of the curve that Thirty Capital is looking at is the five-year end range, which really impacts the exit costs for fixed rate, yield rate, and defeasance. The market is at the highest level it's seen over the summer and around 50 to 60 basis points higher year-on-year. 

Retail and Hospitality: Around 1.85 to 2.10 over ten-year swaps, so investors can get in at around 3% for first and retail deals. Hospitality is around the 2.25 to 2.50 range. 

Overall, there’s a lot of flexibility for lenders at fairly attractive rates. 

For commercial real estate (CRE) investors looking to lock in rates, the time is now.

Thirty Capital Analyst Bryan Kern foresees the market being range-bound for up to the next four weeks—at least until the Feds start tapering.

“If you’re looking at forward exposure, I like 18-months to 24 months forward for six and seven-year tenors,” says Bryan.

“I think we're going to see two things. I think we're going to see rates go up, but the Fed's not going to mess with the short end of the curve for a while. So we're going to see the yield curve steepen. We've even got some clients that are looking at four-year forward two-year (swaps).”

Bryan and Thirty Capital CEO Rob Finlay discuss borrowing examples that they are currently recommending to clients, along with attractive offers from banks.

Some listeners have asked why Thirty Capital’s CRE Capital Markets Report discusses the short and long curve so much, and who cares about the Ten-year? After all, the Fed is controlling both the short end and the long-term curve, so it’s pegged.

Bryan agrees that the Fed does buy across the curve, so to some extent they do manage the long end.

However, he adds that the Treasury market is a big one, and it’s not just the Feds who are buying. And that’s why the show focuses on this issue.

Right now though, at this point in time, all eyes are on the Fed as they are essentially in control of the Ten-year.

“They can pretty much do what they want with it,” says Bryan. That’s why tapering is such a big issue right now. The question is, when do the Feds stop buying?

“When do they stop what I consider interfering in the open markets? The big thing is that at next week’s meeting (will) they mention taper? There's a lot of people who are pressuring the Fed to actually implement the taper this year and finish it pretty quickly . . . some are saying by June of next year, which would be a really quick timeline.”

Rob added that The Wall Street Journal reports that tapering will begin in November.

The Feds will likely begin dialing back spending at that time and reduce their buying, so that over time they will no longer be the biggest buyer in the market. This could result in a two percent rate by year-end, although Bryan’s prediction is closer to the 1.75 to 1.80 range.

Last week Bryan said numerous people have posed the question:  what impact do Treasury and mortgage purchases have on employment? The answer is “None”.

Bryan says there’s nothing that the Feds are doing with Treasury and mortgages that’s affecting employment. “The economy has rebounded significantly and inflation, transitory or not, is extremely high.”

Rob observes that the jobs market isn't as robust as people assume.

“The thing is that small businesses can’t find people. I haven't seen this in a long time where you drive down the street and there are big signs saying: ‘We have work’ or ‘Help wanted’.

Bryan added the August job numbers were much lower than expected. The economy was anticipating 700,000 new jobs, but only produced around 200,000. There was some slight wage growth.

Listen to the full episode for all the detailed discussion.

The market is sentiment-based right now, and that means that it’s difficult to predict what might happen in the coming weeks and months.

Explains Thirty Capital Analyst Jay Saunders: “We're hitting our employment goals. We're hitting our inflation goals. At this point what changes the market is sentiment. And that's really, really, really hard to put timing on.”

Jay explained that even when the market changes in this kind of environment, it’s actually hard to pinpoint exactly what brought about the change.

“The long end of the curve is getting a lot less liquid right now from an investor perspective,” he continued, adding that there is certainly some concern over rates.

Today’s roundtable episode included updates on the types of deals Thirty Capital is working on, and overall market activity. 

Since the start of CRE Capital Markets Report, the team of analysts, led by Thirty Capital CEO Rob Finlay, has been refining its predictions for the Ten-year rate for the close of the year. 

They believe that for a two-per-cent Ten-year to be realized, employment will really need to pick up and inflation will need to slow down somewhat. 

Of course, no one can be sure that these two things will occur, and so the team's revised forecast for the Ten-year rate towards the end of the year is now between 1.50 and 1.75. 

Fed tapering is on the horizon, while the analysts don’t foresee a rate hike until the end of the year. 

Rob raised an issue the team has discussed frequently this year: That when rates move, the volatility of those movements will be severe, and no investor wants to be on the wrong side of that. 

“When you think about it, 20 bips plus 10 bips on a Treasury move, that’s a 30-basis point movement on a loan . . . it’s a 10 percent rate movement,” observes Rob. 

“When you're talking about these numbers, that kind of volatility is huge. And so a deal, that makes sense that at, you know, maybe 20, 30 bips lower, does it make sense that 30 bips higher? A lot of people are looking at it as a longer term.”

Rob fielded a question from a listener who wanted to know if BSBY, which is a private index, could ever go away, forcing borrowers to fall back onto SOFR.

Jay’s response was that if BSBY did cease to exist (and there’s a risk it could), Bloomberg would determine the fall-back index. And if Bloomberg didn’t do that, then the Feds would determine the fall-back. Jay noted that the Feds aren’t fans of BSBY.

What kind of incremental risk does an index pose to a commercial real estate investor who’s set to borrow?

That’s the question Thirty Capital CEO Rob Finlay posed to his team of market analysts at this morning’s CRE Capital Markets Report roundtable podcast.

Analyst Jay Saunders said: “If you have an option your lender is going to tell you what the index should be, or what the lender wants to use.

“To the extent that you have options, you really need to look at your plan of finance,” Jay continues. “If you are a hedging entity, SOFR is going to be a better index for you; BSBY is not.”

Jay pointed out that there isn’t an options market in BSBY. “So if you're a floating rate borrower and you intend to buy a cap, you can't buy a BSBY cap . . . keep that in mind, at least for the moment.”

Jay explained that pure cash borrowers not concerned about hedging need to understand the index they are offered. If you are an entity that chooses to hedge some amount of that exposure, then you really need to think about what the banks are offering you, because some of those indices may be either unhedged, or are much more expensive to hedge than others.

Analyst Jeff Lee says that right now a lot of CRE investors are kicking the can down to Q1 of 2022 and locking in rates. This can potentially change an investor’s finance plan and because a jump in an index could make some deals go sideways.

Jeff says Thirty Capital is talking to a lot of clients about the operational band of where things make sense now versus where they might start not to make sense, even if they go out to six months to a year.

“I think the big thing is that the national average for multi-cap rates was down almost 50 basis points,” he noted. “So you've got this pocket right now of super-low cap rates.”

Jeff says commercial real estate borrowers need to try to know what their threshold is in terms of basis points and the Ten-year, vs cap rates coming back up a little bit.

The market is seeing a lot of issues at play right now, and investors need to know where their threshold and band are, and plan for it.

Floating rate borrowers are likely still comfortable through the end of 2022.

Rob believes the CMBS market will be really interesting because there are a lot of securitizations getting ready to price not just single borrower CMBS, but also multi-borrower in September.

“If they get good execution, that means that you can expect them to be fairly aggressive going forward, especially before the year-end,” observes Rob.

“We're in the market right now for a deal and Freddy really wasn't a player, but Fannie was. This was a multifamily deal that I own outside of Boston and Freddy wasn't really aggressive on it. Fannie was.

“There's lots of sources of capital out there, but it’ll be really interesting to see if the CMBS market can go,” adds Rob. “I know that CLS are also very aggressive right now and they have a great execution on the secondary market. So it'll be really interesting to see if CMBS can unload all these bonds. They're on track for a record-breaking year.”

In this episode the analyst also discuss tapering, which is rumored to begin in November.

Analyst Jason Kelley points out that tapering is on the long end of the curve. The Fed doesn't want to make an inverted curve where short-term interest rates would be higher than long-term interest rates. They are still buying $120 billion of bonds a month now. They're going to start really small.

“Cutting it from $120 billion to $110 billion or $100 billion . . . if it's more than the market thinks, then there's going to be a reaction in the market,” explains Jason.

“Once that long end of the curve starts going up, then they'll start raising short-term interest rates. It's gonna be a long process on the short end before rates rise.”

Wednesday will see GDP and PCE deflator announcements.

Analyst Bryan Kern points out that the market has been range-bound really since the middle of July, between Fibonacci retracement levels of 50% and 61.8% which, on the Ten-year yield, would be a 1.19 and 1.32.

Changes could depend on the next round of employment numbers, but Bryan adds that a two per cent by year-end is certainly doable.

In other news, the FDA fully approved the Pfizer vaccine, and Jay notes that anything that increases vaccines and gets people back to the office is going to be good for the markets.

The markets took a downward turn in response to US withdrawal from Afghanistan, and lackluster consumer spending.

In today’s Thirty Capital market roundtable discussion, the team had different views on how Afghanistan will impact the markets going forward, and the prospect of tapering.

Analyst Jay Saunders says the turmoil in Afghanistan could play out for some time. Analyst Jason Kelley said it’s really a watch-and-see time, noting there is an unwillingness on the part of politicians to step in and take action.

Some Fed members have indicated that tapering will come in Q4, but some analysts are doubtful, saying it will happen when it happens.

“I’ll buy that the Fed’s going to start tapering when it starts tapering, and not before,” says Jay. “They’ll find lots of excuses to keep a lot of stimulus in place.”

Jay notes that there is a lot of talk about the Fed cutting back on issuance of Treasuries, which could play well into a tapering by the Fed.

“It will be beneficial to the market if the Treasury starts issuing a little bit less debt,'' Jay concludes.

Inflation numbers are down slightly, although some prices including oil are up, while lumber is down.

But the biggest shock came with Consumer Price Index (CPI) numbers, which are the lowest in a decade, revealing very low consumer sentiment.

This week, retail sales figures will be released, and the team will be watching closely to see how these figures play out with low consumer sentiment, especially given that stimulus checks have played out.

Meanwhile, the Producer Price Index (PPI) was a little higher than anticipated, noted Analyst Bryan Kern.

Evictions won’t happen in the near future, with the extension of the eviction moratorium. This  will push back some of the pent-up flow of empty housing.

The impact will, of course, be felt once the moratorium is gone.

The US economy is being driven by opposing forces, making it difficult to predict in the long term.

Employment numbers are strong, and the capital markets reacted positively to the news that more Americans are returning to work.

However, the Delta variant is spreading like wildfire across the US.

“Everyone is clearing watching payrolls. That’s what’s driving the Fed, and that’s what’s driving the market. People are going back to work,” says Thirty Capital Analyst Jay Saunders.

“We saw a big rally on Friday based on jobs. The market came down a bit today. Commodity prices, oil prices are all coming down and it’s all being driven by this virus.

“People will look at this and say ‘We've got to get a grip on COVID before the economy is going to open up again’.”

Jay adds that the market likely won’t respond much to the Consumer Price Index numbers this week, as all eyes remain on virus news.

Low Rates, Refinancing Loans, Commercial Defeasance

Thirty Capital CEO Rob Finlay reiterated what he’s said in past episodes of CRE Capital Markets Report: “This is a very opportune time to refinance long-term debt.”

Rob then posed the question of pros and cons of refinancing commercial property loans, and the issue of commercial defeasance.

Analyst Jeff Lee responded: “There’s a lot of history behind that sentiment. Volatility drives a lot of calls and questions.”
Look At Remaining Term-To-Maturity On Loan, Not The Ten-Year

“Whether the Ten-year moves from 1.10, 1.12 or up to 1.30 within a week, if people are going to ask what is that going to do to my defeasance costs or my yield maintenance or whatever fixed-term, early-exit scenario they're looking at . . . The big thing to always remember is everything is pegged off of your remaining term-to-maturity on your specific loan,” explains Jeff.

“Going back to basics, you’re not looking at the Ten-year as a driver of your extra costs. That is generally mismatched to the longer end where the Ten-year resides.”

He explains: “So many people are reactionary to longer moves on the Ten-year, thinking it's going to impact their costs. But in reality, it really doesn't.

“We're looking all across the maturity curve to do some justifications, but it comes in all different forms. Right. Everyone's deal is different and structured differently.”

In this scenario, Thirty Capital is buying bonds at around two to three-year to maturity, several years off the Ten-year.

What’s Your Exit Cost?

Both Rob and Jeff explore the process the team uses when clients want to refinance their loans.

Jeff emphasizes that it’s important to run the numbers and explore all possible scenarios, penalties, tax savings, and cost-saving opportunities with clients.

Economy In Uncharted Waters

With unemployment benefits falling in some parts of the country and evictions on hold, Thirty Capital Analyst Jason Kelley believes that the US economy is in uncharted waters.

“There’s a lot of excess cash in the economy right now,” he explains. “If the moratorium ends on evictions, there’s so much liquidity out there I don’t think we’re going to see a lot of movement in asset prices.”

Adds Rob: “There’s a huge division between people who have money and those who don’t, and it will be interesting to see how the economy operates when it’s the top wage earners who are creating all the supply or demand.”

GDP is well below expectations, but the market reaction to last week’s figures was muted, down seven basis points on Friday.

Thirty Capital Analysts at this morning's meeting commented on the lack of discussion around tapering at the recent Fed Meeting. In fact, the Fed is still purchasing bonds. 

However, the analysts expect that tapering will almost certainly occur in the fourth quarter, and that will certainly send rates up. 

As mentioned in past episodes, a lot of factors are at play in the economy at the moment: Inflation, employment, tapering, and evictions, so the potential for market volatility remains. 

Rates Impacted By Vaccines and Virus News

“Right now, the two Vs—virus and vaccines— seem to drive rates,” commented Analyst Bryan Kern. “We're going to be range-bound for the next few months. It’s primarily because there's just not a lot going on. 

“I don't see anything for the next few months. August and September . . . I think we are going to be slow with regard to the ten-year. We'll have some intraday volatility. But we're going to be range-bound for the next few months.”

Tapering Dependent On Employment Numbers

The team agrees that tapering will be dependent on upcoming employment numbers. Without some big numbers coming out this week and in September, there likely won’t be any tapering in 2021. 

Will Evictions Impact Consumer Spending?

Some states are now allowing landlords to evict tenants who are not paying rent. This opens up the question of impact on consumer spending, and whether renters will spend less now that they must pay rent. 

Analyst Jason Kelley says it will be several months before analysts see the effect of evictions. “On the landlord-side, there’s plenty of backfill if they kick tenants out,” he says. “For the people who are evicted, do they start over and find something a little bit cheaper, are they in a tough spot? It’ll be interesting to see.”

Thirty Capital CEO Rob Finlay says it’s likely that the threat of eviction will prompt some renters to look for work. 

Whether the financial safety net offered by some States is required, or something people take advantage of remains to be seen, comments Jason.

Jason notes that the safety net ends for everyone next month, so the answer will be apparent in Q4. 

SOFR First Initiative Kicks Off

Analyst Jay Saunders noted that the SOFR First initiative has kicked off with the dealers starting to quote dealer-to-dealer screens in the SOFR market. 

The ARRC, which is the committee formed by the New York Fed to see SOFR as a replacement for LIBOR, now has approved SOFR rates, so one- three- and six-month SOFR rates. 

Notes Jay: “The market is trying to figure out how that’s going to be used in derivatives in a limited sense in hedging items and swaps.”

Also In This Episode!
A detailed discussion on SOFR and LIBOR-based loans
What’s happening with short-term markets
The level of market volatility
Inflation concerns.

This week Thirty Capital CEO Rob Finlay took questions from listeners and had the team of analysts respond to them.

The questions are extremely relevant given the current economic climate and announcements anticipated in coming days and weeks.

A listener emailed Rob, asking specifically when is the best time this week to lock in rates. Another listener emailed Rob to ask if rates will go lower. 

Rob put these questions to the team, also asking if they foresee a one percent ten-year Treasury within the near term.

Lock In Before Chairman Powell Addresses Fed

Analyst Bryan Kern took on the first question and said the choice for the listener was whether they should lock-in rates before or after the Fed meeting this week. 

“Given what we know about the Fed, and what Federal Reserve Chairman Jerome Powell is going to say . . .  I think he’s going to be pretty dovish,” observes Bryan. “We could pick up 10 basis points towards the end of the week versus where we are now.”

Analyst Jay Saunders says he recommends making deals and transactions ahead of Chair Powell’s speech on Wednesday. He says: “We could certainly see significant moves (based on the Fed) so why would you put yourself at risk?”

Analyst Jason Kelley agrees, saying his approach would be to recognize when you have a good deal instead of chasing a few basis points. 

Focus Is On Delta Variant And Economic Data

Incoming data on the Delta variant, along with GDP data on July 29 will definitely impact rates. Bryan foresees economic growth coupled with a lot of volatility in the stock market.

He notes: “That (volatility) just tells me no-one has a clue, and we just need to wait for these numbers.”

However, Jay downplays the impact of COVID on the economy, saying what people are really looking at is employment numbers, which kicked off a rally last week. 

COVID certainly plays into it, agrees Jay, but the big question people are asking is can the US expect the growth the economy had in the pre-COVID days, which was around two percent. 

Jay does, in fact, anticipate long-term growth for the economy.

Fed Is Concerned With Where Rates Are Headed

Jay is currently pricing a big transaction and says he aims to get this done before the Fed meeting this week. He adds that the Fed is starting to show concern about where rates are going. 

“It wouldn’t surprise me if Chairman Powel reiterates that the Fed is still on track to start tapering, at least asset purchases, some time in the not too distant future,” says Jay. “The Fed and a lot of market watchers would like to see rates come up a little bit.”

In this episode, the team explores:

What’s happening with rates, and what could happen in coming months Why borrowers looking at floating rates need to look at SOFR or BSBY, not LIBOR What kinds of factors borrowers should consider when getting quotes Economic analysts’ focus on jobs and job creation.