Capital Markets Update Week of 10/1
October 1, 2024
Private-Label CMBS and CRE CLOs
Three transactions totaling $2 billion priced last week:
- BANK 2024-BNK48, a $1.1 billion conduit backed by 40 10-year loans secured by 79 properties from Morgan Stanley and six other loan contributors
- MSC 2024-NSTB, a $489.9 million seasoned collateral transaction, consisting of small-balance multifamily mortgages acquired by Morgan Stanley from the now-defunct Signature Bank
- HIH 2024-61P, a $423.6 million SASB backed by a floating-rate, five-year loan (at full extension) for Starwood Capital to refinance a portfolio of 61 select-service, extended-stay, and full-service hotels in 22 states
By the numbers:
- According to Commercial Mortgage Alert, six transactions totaling over $5 billion are in various stages of marketing.
- Year-to-date: Private-label CMBS and CRE CLO issuance totals $77.1 billion, more than double the $32.5 billion for same-period 2023.
Spreads Largely Steady
- Conduit AAA and A-S spreads were unchanged at +91 and +140, respectively. YTD, AAA and A-S spreads are both tighter by 25 bps.
- Conduit AA and A spreads were unchanged at +185 and +235, respectively. YTD AA and A spreads are tighter by 40 bps and 140 bps.
- Conduit BBB- spreads held steady at +540. YTD, BBB- spreads have tightened by 360 bps.
- SASB AAA spreads were unchanged at +125 to +155, depending on property type. They have narrowed from +143 to +212 at the start of the year.
- CRE CLO AAA spreads were tighter by 5 bps to +165 static/+170 managed. BBB- spreads were tighter by 25 to 50 bps to +450 / +475 (Static / Managed).
Agency CMBS
- Agency issuance totaled $3 billion last week, consisting of $1.9 billion in Fannie DUS, $628 million in Freddie K and Q transactions, and $393.2 million in Ginnie transactions.
- Agency issuance for the year totaled $75.5 billion, 17% lower than the $90.9 billion for the same period last year.
The Economy, the Fed, and Rates…
Economic Data
- Inflation Cooling: The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, fell to 2.2% in August, down from 2.5% in July and below economists' expectations of 2.3%. This marks the slowest annual inflation reading since early 2021.
- Core PCE, which excludes volatile food and energy prices, increased 2.7% year-over-year, unchanged from July. This suggests underlying inflation pressures remain sticky, especially from persistent elevated housing costs.
- Jobless Claims: Initial unemployment claims fell by 4,000 to 218,000 in the week ended September 21, reaching a four-month low. This defies concerns about a hiring slowdown and suggests layoffs remain muted despite a rise in the unemployment rate.
- GDP Growth: According to the third estimate by the Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 3% in second-quarter 2024. This matched the second estimate from August, avoiding an expected slight downward revision and indicating solid underlying economic momentum. First-quarter GDP was revised upward slightly to 1.6% from 1.4%.
- Consumer Sentiment: The University of Michigan’s consumer sentiment index reached 70.1, a five-month high, signaling growing optimism about the economy post the Fed 50 basis point rate cut. However, the Conference Board's Consumer Confidence Index fell to 98.7, its lowest since August 2021, driven by concerns over the labor market and economic outlook.
Fed Policy
- The Fed implemented a 50 basis-point cut in September, bringing the benchmark rate to a range of 4.75%–5%. The rate cut was the first since the pandemic. The central bank signaled more rate cuts ahead, driven by progress in inflation control.
- Fed Chair Jay Powell stressed the Fed’s goal of maintaining a strong labor market while combating inflation. With the September employment report looming, the Fed’s rate path may hinge on how the job market evolves. A significant rise in unemployment could accelerate the pace of rate cuts.
- Investors will also monitor data on job openings, private sector hiring, and employment gauges in the ISM manufacturing and service sectors to assess the labor market's health.
- Futures markets suggest a near-even split between another half-point cut and a smaller quarter-point cut in November. Investors are pricing in roughly 75 bps of additional rate cuts by year-end 2024.
Treasury Yields
- The yield on 2-year Treasuries dropped 3 bps on the week to 3.56%, while the 10-year yield was up 1 bp to 3.75%.
- After being "inverted" – when the 2-year yield is higher than the 10-year yield – for a record stretch of over two years, it ‘dis-inverted’ recently, with the 10-year yield exceeding the 2-year yield. At one point last week, the differential exceeded 20 bps, the first time in more than two years.
- Most of the steepening has come from the 10-year yield rising rather than the 2-year's decline, meaning factors beyond the near-term, like Fed rate cuts, have been key. Part of this is normalization, with investors demanding a higher return to lend to the government for a longer period of time. However, the rise in the 10-year yield may also reflect the desire to be compensated for the risk of higher inflation in the future.
Go deeper: You can download CREFC’s one-page MarketMetrics with statistics covering the economy and the CRE debt capital markets here.
Contact Raj Aidasani (raidasani@crefc.org) with any questions.