Capital Markets Update Week of 4/15
April 15, 2025
Private-Label CMBS and CRE CLOs
Three transactions totaling $930 million priced last week:
- WFCM 2025-DWHP, a $330 million SASB backed by a floating-rate, five-year loan (at full extension) for Driftwood Capital to refinance nine hotels totaling 1,866 rooms in five states.
- SDAL 2025-DAL, a $330 million SASB backed by a floating-rate, five-year loan (at full extension) for Elliott Management and Chartres Lodging Group to refinance the Sheraton Dallas hotel in downtown Dallas.
- BWAY 2025-1535, a $300 million SASB backed by a fixed-rate, five-year loan for Vornado Realty Trust to refinance a 106,481 sf purpose-built retail and theater condominium located in Times Square.
According to Commercial Mortgage Alert, prior to the above noted transactions, no new CMBS have hit the market since President Trump’s April 2 tariff announcement. The three transactions priced last week had been in mid-marketing when tariffs were first announced. According to CMA, “All printed at much wider-than-expected spreads.”
Issuance by the numbers: Year-to-date private-label CMBS and CRE CLO issuance totals $47.4 billion, a 126% increase from the $21 billion recorded for same-period 2024.
Spreads Trend Wider
- Conduit AAA and A-S spreads were unchanged at +108 and +150. YTD, they have widened 33 bps and 45 bps, respectively.
- Conduit AA spreads were unchanged at +220, while A spreads widened 25 bps to +275. YTD, they are wider by 130 bps and 160 bps, respectively.
- Conduit BBB- spreads widened 50 bps to +625. YTD, they are wider by 200 bps.
- SASB AAA spreads widened 20-23 bps to the +160 to +178 range, depending on property type. YTD, they have widened 53 to 68 bps.
- CRE CLO AAA spreads widened 30 bps/25 bps (Static/Managed) to +180/+180, while BBB- spreads widened 105 bps/90 bps to +475/+475.
Agency CMBS
- Agency issuance totaled $2.8 billion last week, comprising $1.3 billion of Freddie K and Multi-PC transactions, $1.3 billion of Fannie DUS, and $153.3 million of Ginnie Mae Project Loan transactions.
- Agency issuance for the year totals $37.1 billion, 34% higher than the $27.6 billion for same-period 2024.
The Economy, the Fed, and Rates…
Economic Data and Outlook
- Inflation Cooled Pre-Tariff, but the Future Looks Hotter: March CPI and PPI data showed unexpected cooling, with headline CPI falling 0.05% month-over-month and PPI dropping 0.4%, largely due to lower energy costs. Core CPI rose just 0.06%. However, this data precedes the full impact of recent tariff hikes. Economists widely expect tariffs to push inflation higher later this year; New York Fed President John Williams projected inflation could reach 3.5% to 4%. The timing remains uncertain, potentially delayed until June or later, as businesses likely stockpiled inventory (estimated at a two-month cushion) ahead of the tariffs.
- Signs of Consumer Strain Emerge: While some bank executives maintain that consumers remain resilient, warning signs are flashing. JPMorgan reported credit card loan charge-offs hitting a 13-year high in Q1, surpassing pre-pandemic levels. Philadelphia Fed data showed the share of borrowers making only minimum payments reached a 12-year high at the end of 2024, with delinquencies also rising.
Moreover, the University of Michigan Consumer Sentiment
Index plunged in April to a roughly three-year low, citing "growing worries about trade war developments." Expectations for unemployment rose to the highest since 2009, and inflation expectations surged to multi-decade highs. Retail foot traffic data suggest a shift toward low-priced warehouse stores, possibly indicating stockpiling ahead of tariffs. JPMorgan CEO Jamie Dimon noted credit quality hinges on employment, currently at 4.2%.
- Growth Forecasts Dimmed, Recession Fears Rise: Economists anticipate a significant economic slowdown due to tariffs and related uncertainty. NY Fed's Williams expects GDP growth below 1% this year. JPMorgan pegs recession odds at 50/50, while BlackRock's Larry Fink stated the U.S. is "very close, if not in a recession now." Several economists forecast a recession as their base case if high tariffs persist. Goldman Sachs expects only 0.5% GDP growth this year.
- Fiscal Concerns Loom: The U.S. fiscal deficit reached $1.307 trillion in the first half of fiscal 2025 (October-March), the second-largest on record for that period, partly driven by record interest payments on the national debt totaling $582 billion. Economists noted the link between large budget deficits and trade deficits, highlighting a contradiction in pursuing policies aimed at lowering the trade deficit, while potentially increasing the budget deficit (e.g., via tax cuts funded by uncertain tariff revenue).
- Oil Market Impact: The U.S. shale revolution significantly reduced the U.S. trade deficit by turning the nation into a net oil exporter. However, current administration policies, including pressure on OPEC+ and the potential economic slowdown from tariffs, have pushed WTI crude prices towards $60/barrel. Analysts warn that prices below the average breakeven point for shale producers (estimated around $65/barrel) could curtail U.S. production, necessitate increased imports, and consequently widen the trade deficit again, undermining a key administration goal.
Federal Reserve Policy
- Patient Stance Amid Uncertainty: Fed officials signaled a clear intention to remain patient and hold interest rates steady, ruling out preemptive "insurance" cuts against a potential tariff-induced slowdown. Chair Powell emphasized no need to hurry policy moves, while others like Cleveland Fed President Hammack stressed the importance of waiting to "move in the right direction." NY Fed President Williams called the current stance "entirely appropriate."
- Navigating a Policy Dilemma: Officials acknowledged the conflicting pressures created by tariffs: rising inflation calls for tighter policy, while potential weakening growth and higher unemployment call for easing. Minneapolis Fed President Kashkari noted the "hurdle to change the federal funds rate one way or the other has increased due to tariffs." St. Louis Fed President Musalem highlighted the "distinct possibility" of rising inflation alongside a softening labor market. Lawrence Summers described the situation as "standard emerging-market territory where a central bank is hamstrung."
- Market Intervention Readiness: While bank executives suggested regulatory tweaks to aid market functioning, Fed officials like Boston Fed President Collins and Kashkari stated that while markets show stress, they are functioning adequately without liquidity concerns overall. However, Collins affirmed the Fed "would absolutely be prepared" to use its tools to intervene and stabilize markets if conditions became disorderly.
- Rate Cut Outlook Dims: While futures markets still price in rate cuts this year, Fed commentary suggests a higher bar for easing. Several officials emphasized the need for more data and clarity on the economic trajectory before adjusting policy. Some economists now forecast only one rate cut late in the year, likely December.
Markets
- ‘Not Normal’ Yield Surge: U.S. Treasury yields experienced unusually sharp increases despite broader market turmoil. The 10-year Treasury yield surged approximately 50 basis points over the week to end near 4.5%, its largest weekly rise since 2001. The 30-year yield jumped over 48 basis points to near 4.9%, its biggest weekly increase since 1987. This counterintuitive move, yields rising when haven demand should push them lower, was described by analysts as "not normal behavior."
- Market Stability Questions: The erratic yield movements and signs of stress raised concerns about the stability and liquidity of the Treasury market, drawing comparisons to the pandemic-induced seizure in March 2020. Speculation centered on potential causes, including foreign capital flight driven by tariff policies and eroding confidence in U.S. assets, as well as the possible unwinding of leveraged hedge fund strategies like the Treasury basis trade.
- Extreme Volatility, Weekly Gain: The S&P 500 experienced extreme volatility, including sharp declines and powerful rallies, ultimately notching its best weekly gain (+3.8%) since November 2023. However, the intra-week trading range rivaled the depths of the pandemic, described as a "roller coaster" driven by "emotionally charged" sentiment and tariff uncertainty. The VIX volatility index rose to levels last seen in March 2020.
- Dollar Weakens Despite Risk-Off: The dollar fell sharply against major currencies, hitting a three-year low against the euro, contrary to its typical behavior of strengthening during global financial stress. This simultaneous decline in stocks and bonds fueled concerns about waning confidence in U.S. assets.
- Haven Status Questioned: Fund managers warned that erratic policymaking, rising trade barriers, and threats to institutional stability (like Fed independence) are undermining the dollar's long-standing role as the world's primary safe haven and reserve currency. Bob Michele of JPMorgan Asset Management stated, "There is [now] a very good case for the end of American dollar exceptionalism." This potential shift could lead to higher U.S. borrowing costs and diminished global influence over time.
- Gold Surges to Record Highs: Gold benefited significantly from the market turmoil, climbing over 6.5% to a record high of $3,237 per troy ounce, its largest weekly gain since the early pandemic stages in March 2020. Investors flocked to gold as confidence in traditional havens like U.S. Treasuries and the dollar wavered amid the tariff fallout. Analysts noted gold buying was motivated by fear and worries "about the system breaking."
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