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Capital Markets Update Week of 1/7

January 7, 2025

2024 Issuance Recap

• Private-Label: 2024 CMBS and CRE CLO issuance totaled $112.8 billion, 145% ahead of the $46 billion in issuance for 2023 and 12% higher than the $100.5 billion in 2022.
• Agency: 2024 Agency issuance totaled $124.1 billion, 3% higher than the $120 billion in 2023 and 24% lower than the $162.4 billion in 2022.

The Economy, the Fed, and Rates…

Economic Data

• Initial Jobless Claims Show Labor Market Resilience: Initial jobless claims declined to 211,000 in late December 2024, reaching an eight-month low, signaling resilience despite the holiday-season volatility. Continuing claims, while trending higher earlier, also fell to a three-month low, indicating a less tight labor market but not one in distress. The unemployment rate stood at 4.2% in November, with December data due on January 10.
• Manufacturing Activity Shows Mixed Signals: The ISM Manufacturing PMI rose to 49.3 in December, the highest level since March, though still indicating contraction. The improvement was driven by increased production and accelerating new orders, suggesting potential stabilization in the sector.
• Mortgage Rates Approach Critical Level: Home mortgage rates approached 7% again, threatening to squeeze buyers. The average 30-year mortgage rate rose to 6.91% as of January 2, potentially exacerbating the ongoing "lock-in" effect in which homeowners with low-rate mortgages are reluctant to move.
• Consumer Resilience through 2024: The economy defied expectations for a slowdown throughout 2024, with Bloomberg Economics estimating household outlays advanced 2.8% - faster than in 2023 and nearly double their projection at the start of the year. However, pandemic savings have largely been exhausted, and spending is increasingly driven by higher-income households benefiting from wealth effects in housing and stock markets.

Federal Reserve Policy

• Fed Officials Signal Continued Vigilance: Despite three rate cuts in 2024 totaling 100 basis points, Fed officials emphasize the fight against inflation isn't complete. Core PCE inflation stands at 2.8%, still above the Fed's 2% target. Fed Governor Adriana Kugler stated explicitly:

"We are fully aware that we're not there yet... No one is popping Champagne anywhere - not close to us." 

• Housing Inflation Remains Key Concern: Officials are particularly focused on housing inflation, which measured 4.8% year-over-year in November despite showing month-to-month improvement. The situation is complicated by what Kugler describes as the "unusual" dynamic of homeowners holding onto low-rate pandemic-era mortgages.

Treasury & Bond Markets

• Treasury Yields Defy Rate Cut Impact: Despite three Fed rate cuts since September, the 10-year Treasury yield has climbed ~90 basis points since the initial easing move (ending 2024 at 4.57%). Market forecasts show divergence, with the median analyst prediction expecting yields to fall to 4.15% by end-2025, while market-implied forecasts suggest 4.67%.
• Debt Sustainability Concerns Mount: The federal deficit reached $1.8 trillion (over 6% of GDP) in fiscal 2024, matching World War II-era debt-to-GDP levels. With nonpartisan CBO projections showing continued high deficits and potential additional tax cut costs under the incoming administration, analysts increasingly warn about risks to America's last remaining triple-A credit rating.
• Tight Corporate Bond Spreads Persist: Corporate bond valuations have reached their most extreme levels, flashing their biggest warning in almost 30 years as an influx of money from pension fund managers and insurers boosts competition for assets. Spreads, the premium for buying corporate debt rather than safer government bonds, can remain low for a prolonged period, partly because fiscal deficits have made some sovereign debt less attractive. As Christian Hantel of Vontobel notes: 

"You could easily make a call that spreads are too tight, and you must go somewhere else, but that's only part of the story...When you look at history, there are a couple of periods when spreads stayed tight for quite some time. We are in such a regime at the moment."

You can download CREFC’s one-page MarketMetrics with statistics covering the economy and the CRE debt capital markets here.

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