Capital Markets Update Week of 7/2
July 2, 2024
Private-Label CMBS and CRE CLOs
Four CMBS transactions totaling $2.4 billion priced last week:
- BMO 2024-C9, a $943.3 million conduit backed by loans with terms of up to 10 years from BMO and 11 other loan contributors
- BFLD 2024-WRHS, a $608.4 million SASB backed by a floating-rate, five-year loan (at full extension) to finance Brookfield’s acquisition of 83 industrial properties across eight states
- ARES 2024-IND, a $590 million SASB backed by a floating-rate, five-year loan (at full extension) to recapitalize Ares Management’s equity interests on 30 industrial properties across 10 states
- BFLD 2024-VICT, a $265 million SASB backed by a floating-rate, five-year loan (at full extension) for Brookfield and Queensland Investment to refinance a portion of the 1.2 million square foot Victoria Gardens shopping center in Rancho Cucamonga, CA
According to Commercial Mortgage Alert, four additional offerings totaling $2.8 billion are currently in various stages of marketing. Year-to-date private-label CMBS and CRE CLO issuance totaled $46.2 billion, well ahead of the $18.6 billion for the same period last year.
Spreads Mixed
- Conduit AAA and A-S spreads were wider by 5 bps at +100 and +140. YTD, AAA and A-S spreads are tighter by 16 bps and 25 bps, respectively.
- Conduit AA spreads and A spreads were unchanged at +140 and +210. YTD AA and A spreads are tighter by 85 bps and 165 bps, respectively.
- Conduit BBB- spreads were unchanged at +575. YTD, BBB- spreads have tightened by 325 bps.
- SASB AAA spreads were wider by 8 bps, ranging from +150 to +160, depending on property type. They have narrowed from +160 to +188 at the start of the year.
- CRE CLO AAA spreads were unchanged at +160 and + 165 (Static / Managed). BBB- spreads were also unchanged at +640 and +645 (Static / Managed).
Agency CMBS
- Agency issuance totaled $1.1 billion last week, consisting of $767.9 billion in Fannie DUS and $304.1 million in Ginnie Mae transactions.
- Agency issuance year-to-date totals $46 billion, 20% lower than the $57.5 billion for same-period 2023.
The Economy, the Fed, and Rates…
Economic Data
- The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred measure of inflation, eased to 2.6% in May, down from 2.7% in April. Core PCE, which excludes food and energy, also eased, to 2.6%, down from 2.8% in April, and the lowest reading since March 2021.
- Inflation remains above the Fed’s 2% target, but it is much lower than its 2022 PCE Index peak of 7.1%, and CPI’s even higher peak of 9.1% (now 3.3%).
- Last week’s report also showed that consumer demand remains resilient despite higher borrowing costs. Inflation-adjusted outlays for services rose 0.1%, while spending on merchandise advanced 0.6%. Solid wage growth continues to power consumer spending. Wages and salaries rose 0.7%. On an inflation-adjusted basis, real disposable income jumped 0.5%, the most since January 2023.
- Consumer sentiment declined in June by less than initially estimated. The University of Michigan’s final June index eased less than a point to 68.2. The median estimate in a Bloomberg survey of economists called for a final reading of 66. The improvement in sentiment reflected a more favorable outlook for the economy and prospects for lower interest rates.
- A Financial Times opinion piece argued that the US economy’s outperformance in recent years compared to other countries might result from the “high-pressure economy” experiment, where strong policy support and a tight labor market have spurred investment and productivity gains. The combination of the pandemic and the policy failures in the aftermath of the financial crisis effectively led the US to run the experiment.
Fed Policy
- The Fed’s next rate-setting meeting is on July 30 - 31. The central bank is expected to keep rates unchanged at the current target rate of 5.25% - 5.50%. Policymakers suggest they still could make one or two rate cuts before year-end 2024. Investors now think the first reduction could come in September – most likely making it the final policy decision ahead of the presidential election on November 5.
- Market-implied expectations for inflation, as reflected in the breakeven rate between Treasury Inflation-Protected Securities (TIPS) and regular Treasuries, suggest that the market's expectation for CPI is in line with the Fed's 2% target.
- While inflationary pressures have lessened in recent months, disappointing data at the start of the year led the central bank to delay the beginning of a rate-cutting cycle. Fed officials have been clear that they will cut rates when inflation has decelerated enough to make them confident that it is entirely under control or if the job market shows an unexpected cooling.
- Following last week’s presidential debate, markets began to weigh the impact of a victory by former president Donald Trump. Barclays strategists suggested the market should “be pricing in a considerable risk of higher-than-target inflation in the coming years.” Trump has proposed steep tariffs on imports, particularly on goods from China, and has pledged to extend across-the-board tax cuts, stimulating an economy the Fed seeks to restrain.
Treasury Yields
- The policy-sensitive 2-year T-note yield ended the second quarter up 13 bps to 4.75%, while the 10-year yield ended the quarter at 4.40%, up 20 bps. The 2-year yield was up 2 bps on the week, while the 10-year yield was up 14 bps on the week.
- Treasury yields have retreated from their late-April highs due to easing inflation and signs of an economic slowdown. The 2-year yield reached 5.04% in late April, while the 10-year reached 4.70%.
You can download CREFC’s one-page MarketWatch with statistics covering the economy and the CRE debt capital markets here.
Contact Raj Aidasani (raidasani@crefc.org) with any questions.