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Capital Markets Update Week of 4/1

April 1, 2025

Private-Label CMBS and CRE CLOs

While only one transaction priced last week, five transactions totaling $2.5 billion are expected to price this week:

• Last week’s sole transaction was the SKY 2025-LINE, a $475 million SASB backed by a floating-rate, five-year loan (at full extension) for Hudson Pacific Properties (HPP) on six Class-A office properties totaling 1.4 million sf in California and Washington.

By the numbers: Year-to-date private-label CMBS and CRE CLO issuance totaled $44.5 billion, 130% higher than the $19.4 billion for same-period 2024. 

Spreads Mostly Stable…

Conduit CMBS Spreads

• AAA spreads tightened 6 bps to +92; A-S spreads remained unchanged at +140.
• Conduit AA and A spreads were unchanged at +180 and +220, respectively.
• Conduit BBB- spreads were unchanged at +500.

SASB CMBS Spreads

• SASB AAA spreads widened 5 bps, ranging from +140 to +150, depending on property type.
• CRE CLO AAA and BBB- spreads widened 15 bps to +145/+150 (Static/Managed) and +370/+385 (Static/Managed), respectively. 

Agency CMBS

• Agency issuance totaled $1.5 billion last week, comprising $600 million of Fannie DUS, $445.4 million of Ginnie Mae Project Loan transactions, and a $437.3 million Freddie Q transactions.
• Agency issuance for the year totals $31.4 billion, 32% higher than $23.9 billion for same-period 2024.

The Economy, the Fed, and Rates…

Economic Data and Consumer Sentiment

• Consumer confidence continues to weaken. The University of Michigan Consumer Sentiment Index plummeted in March to its lowest level since 2022, with long-term inflation expectations surging to 4.1% – the highest since 1993. According to the report:

• Small businesses are showing stress signals. In 2024, more small businesses reported revenue decreases (41%) than increases (38%) – the first time this has occurred since 2021. The Federal Reserve's small business survey revealed weakening profitability, with 35% of firms operating at a loss despite 46% reporting profits.
• Retail indicators flash warning signs. Retail brands, such as Lululemon, reported significant softness in U.S. store traffic due to consumers becoming more cautious amid persistent inflation fears and tariff uncertainties. This signals potential trouble ahead for discretionary spending.
• GDP and corporate profits end year on a high note. Q4 2024 GDP growth was revised upward to 2.4%, driven by strong corporate profits, which grew by 5.9% after tax. However, future outlooks are increasingly uncertain due to trade and tariff issues.
• Growth forecasts revised downward. Despite solid end-of-year momentum, Goldman Sachs revised its Q1 GDP forecast down to an annualized growth rate of 0.6%, citing weak consumer spending data. The Atlanta Fed's GDPNow model projects a 2.8% contraction for Q1, reflecting broader economic fragility.

• Inflation remains stubbornly above target. Core PCE inflation rose 0.4% in February, which pushed the year-over-year pace to 2.8%. Higher healthcare and financial services costs accounted for much of the inflation in the Fed's "supercore measure" — core services excluding housing. The overall PCE price index was up 2.5% from a year ago, unchanged from January.
• Tariffs threaten to reignite price pressures. Federal Reserve Bank of Boston President Susan Collins said it looks:

• Research suggests significant inflationary impact. St. Louis Fed President Alberto Musalem highlighted research estimating that a 10% increase in the "effective U.S. tariff rate" could increase inflation by as much as 1.2 percentage points, including both direct (0.5 percentage points) and indirect effects (0.7 percentage points).

• The "golden path" of disinflation without economic harm has come to an end. Chicago Fed President Austan Goolsbee told The Financial Times that the central bank was no longer on the "golden path" witnessed in 2023 and 2024, when inflation seemed to be falling back to 2% without derailing growth or raising unemployment. It had now entered "a different chapter" where "there's a lot of dust in the air."
• Balance sheet strategy adjustments. The Fed has slowed the pace of quantitative tightening, reducing the cap on monthly Treasury security runoff to $5 billion from $25 billion. This move appears aimed at avoiding a repeat of the market turmoil in September 2019, when reserves fell too low, rather than signaling a broader policy shift. Analysts questioned the Fed’s transparency and consistency regarding balance-sheet management, suggesting potential conflicts between its inflation mandate and balance-sheet strategies.
• Fed holding steady – for now. Despite elevated inflation expectations and deteriorating growth forecasts, the Fed signaled it will not cut rates until at least until late-2025, unless significant labor market deterioration occurs. Despite the Fed's current stance, market indicators are pricing in two quarter-point rate cuts for 2025, underscoring investors' skepticism that the Fed can maintain restrictive policy amid deteriorating economic conditions.

• European markets outperform. The pan-European Stoxx 600 outpaced the S&P 500 by nearly 17 percentage points this quarter in dollar terms – a record outperformance. Germany's benchmark DAX Index jumped 13%, as investors were initially drawn to value after years of underperformance, and then further buoyed by Germany's fiscal plans to increase defense and infrastructure spending.
• Tech sector experiences pressure. All megacaps declined, with Amazon.com and Alphabet falling by more than 4%. The Nasdaq Composite lost 2.7%, notching a drop of at least 2% in March for the fifth time – the most for a single month since the bear market in June 2022.

Treasury Yields and Debt Concerns

• Treasury Secretary Bessent's yield focus. Treasury Secretary Scott Bessent has been intensely focused on pushing down 10-year bond yields through speeches, interviews, and concrete actions, including limiting auction sizes. This campaign has contributed to yields dropping by a half-percentage point over the past two months, although much of this decline can be attributed to recession fears triggered by Trump's tariff threats.
• U.S. debt trajectory alarming. The Congressional Budget Office stated that the U.S.'s debt-to-GDP ratio would reach 107% during the 2029 fiscal year, exceeding the peak of the 1940s’ era, and continue rising to 156% by 2055. The CBO warned,

• Yields affect broader markets. Wall Street strategists have cut their year-end forecasts for 10-year yields, partly influenced by Bessent's campaign. According to Guneet Dhingra at BNP Paribas,

• Treasuries make a round trip. Treasury yields rose from Monday through Thursday last week but gave it all back on Friday as investors flocked to safety. The 10-year yield dropped 11 bps on Friday, settling at 4.25%, unchanged from the prior week.
  
   

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