Signs of Inevitable Fed Rate Hike Affect Financial Markets

Impending rate hikes from the Fed have been in the "we’ll believe it when we see it" category for the past few years. The first week of August brought the first solid indications that the Fed will actually go through with a September rate increase. Atlanta Fed president Lockhart was quoted saying it would take serious deterioration in the economy to delay a September hike. Friday's jobs report was good enough to keep the plan intact.

On top of that, corporate earnings continued to roll out with what appeared to be as many misses as beats. Oil remains below $50 on a downward trajectory. These factors helped send the Dow and S&P down 2% and 1.5%, respectively, on the week. Contributing to the S&P drop was a 5% weekly slide for Apple.

Two new conduit CMBS deals priced on Thursday and another two were in the works on Friday. According to Commercial Mortgage Alert, CSAIL 2015-C3 ($1.4B) and CGCMT 2015-P1 ($1.1B) priced their long AAA bonds at 107 and 106 bps over swaps, respectively. Both deal's BBB- tranches went for 390 bps over swaps.

Legacy AMs, LCFs, and AJs gapped out 5 to 10 bps on average, with 2005 vintages showing the most volatility as more loans approach maturity. Trading volume reached $300 million on Tuesday and Thursday but otherwise was relatively anemic. We expect that to be the case throughout the rest of August, which is a normally quiet month.

Two large impending modifications ($317M Empirian Multifamily Pool 2 in MLCFC 2007-8 and $144.2M Colony IV Portfolio in JPMCC 2006-LDP9) came to light this week as well. We will continue to monitor those as August data rolls in.

Finally, Fox News held the first Republican presidential primary debates on Thursday. The main event garnered 24 million viewers. but Nielsen has yet to release the exact percentage of viewers watching just to see what "The Donald" would say (we assume the majority). Carly Fiorina and Marco Rubio seemed to be the big gainers on Thursday, but we're sure the only name that will matter to investors in the near term is Janet Yellen. 

CMBS Swap Spreads



Legacy LCF Price and Swap Spread Movement

The Fed’s predicament in three paragraphs (Be the Fed)

Summary:  The Fed has few options in driving mortgage rates back down when not tapering hasn't done enough.  Lowering the Fed Funds Rate is pointless when you're virtually at 0%, forward guidance has little effect on long term rates, false, negative forecast may bring rates down, but will also stall economic activity, false positive forecast could bring rates up, which is self-defeating.  Basically, the Fed is out of options.

St. Croix --(CreditWritedowns.com and The Center of the Universe)--


So imagine you are a moderate FOMC number.

Mortgage apps are down, new home sales marginal, and private sector job creation sagging. And you keep revising your GDP forecast lower at each meeting. Likewise inflation remains low, and you believe the risks are asymmetrical. That is, you know you can stop inflation and growth with rate hikes, but you’re not so sure about fighting deflation.

And so, as an FOMC member, you’d like to see mortgage rates back down. So how do you get them there? You might not like QE, and at least highly suspect it doesn’t have any first order effects, and you fear there are unknown costs, but you know tapering, for whatever reason- almost to the point the reason doesn't matter- causes rates to go higher. And you know not tapering brought them down some, but not enough. Fed funds are already close to 0% so there’s no room there. Forward guidance, etc. has kept the short end low but not the long end. You are afraid to simply peg long rates with an unlimited bid for securities at your target rate. You know a weaker economic forecast will bring long rates down but that it would be intellectually dishonest to manipulate a forecast.

And maybe worst of all, if you do something that causes markets to believe the economy will do a lot better, mortgage rates go higher, presuming Fed rate hikes will accompany growth, and thereby make things worse instead of better.

http://www.creditwritedowns.com/2013/10/the-feds-predicament-in-three-paragraphs.html

http://moslereconomics.com/2013/10/25/be-the-fed/