CREFC Capital Markets Update: Week of 6/27
June 27, 2022
Support Builds for Another 75 Basis Point Rate Increase
The newest Fed Governor, Michelle Bowman, recently indicated early backing for a 75 basis point increase at the next policy meeting in July. "Depending on how the economy evolves, further increases in the target range for the federal funds rate may be needed," she said in remarks delivered at an event hosted by the Massachusetts Bankers Association. Bowman joins Christopher Waller in supporting another large hike. In remarks delivered on June 18, Waller affirmed the central bank's commitment to tackling the worst inflation problem in more than 40 years, saying it was "all in on re-establishing price stability."
Mounting support for another aggressive rate adjustment came just days after the Fed implemented the first 75 basis point increase since 1994 and signaled its support for significantly more monetary tightening this year. Most officials now expect the federal funds rate to rise to around 3.75% by December, up from the current target range of 1.50% to 1.75%.
Bowman's comments echoed Fed chair Jay Powell's testimony in front of Congress last week. Powell told Senate lawmakers that a recession was "certainly a possibility" as the central bank steps up its efforts to counter soaring prices. "The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy," Powell noted. "We can't fail on that task. We have to get back to 2% inflation."
Slow Issuance Week amidst Macro Volatility and Rising Rates
- Private-Label CMBS and CRE CLOs. Only one private-label transaction priced last week: a $754 million CRE CLO. The market is facing continued macro uncertainty and the challenges of originating new loans at higher coupons and lower valuations.
- The risks of the U.S. entering a recession have picked up sharply in recent weeks following the Fed's decision to go big on rate increases to counter surging inflation. Goldman Sachs doubled the risk of a U.S. recession this year from 15% to 30%, with a 48% probability of a recession over a two-year horizon.
- As of June 24, CMBS and CRE CLO issuance stood at $71.8 billion, only 7% higher than the same period in 2021 ($67.0 billion), with much of the heftier issuance coming earlier in the year.
- Lower issuance in recent months has significantly narrowed the overall year-over-year margin following a solid start to the year. At the end of Q1 2022, total issuance was 70% ahead of the same period in 2021.
- According to BofA Global Research, some 21 private-label transactions totaling ~$13 billion are in the current pipeline consisting of five conduit, seven SASB CMBS, and nine CRE CLO transactions. However, if current market conditions persist, it is expected that pricing will be delayed and timelines extended as issuers wait for less volatile markets and more assured execution.
- Secondary spreads narrowed slightly at the top of the capital stack while widening at the bottom:
- Conduit BBB- spreads widened by 23 bps on the week and 70 bps month-to-date as investor concerns grow over the potentially negative impact higher rates and an economic slowdown will have on the sector.
- BBB- spreads widened by 23 bps on the week and 70 bps month-to-date as investors became concerned with the impact of higher rates and an economic slowdown.
- Agency CMBS. Last week saw just over $6 billion in new agency issuance with advances in Fannie DUS, Freddie K, and Ginnie Project Loan transactions.
- Total agency issuance reached $90.4 billion for the year-to-date period ended June 24. Agency issuance is down 5% from last year's point ($94.9 billion).
- Benchmark agency spreads were all unchanged over the week.
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