European Central Bank's QE Plan Lifts US Markets

Last week’s ‘Word of the Week’ was undeniably deflation. Some highly anticipated press conferences on Thursday put the word to work. The first came from Mario Draghi, who provided transparency on the European Central Bank’s plan to fight the shriveling Eurozone economy. Later that afternoon, Tom Brady gave some clouded responses to questions on his organization’s own deflation issues, and the crisis of ‘deflategate.’ While we’re sick of hearing about deflated footballs, we are eager to see how the market reacts to the new European Quantitative Easing plan over the coming weeks.

The market reaction to the ECB’s announcement to purchase €60 billion worth of bonds a month until at least September 2016 was fairly strong. The Euro fell to $1.1229, government bond yields in the Eurozone sank, and European equities surged with confidence. The 10-year US Treasury yield reacted by dipping as low as 1.78% inter-day and ended Friday at 1.79%. US equities finished higher for the week, up over 2%.

The President’s State of the Union address was also last week, which emphasized ‘middle-class economics,’ but ultimately received more attention for Obama’s ad-libbing at the crowd’s reactions. In CMBS news, Standard and Poor’s reached a settlement with the SEC on Wednesday regarding the accusation of loosening ratings criteria in 2011. S&P was struck with $77 million in fines and ‘a one-year timeout from rating conduit fusion CMBS.’

CMBS spreads tightened just slightly for the shortened week and trading volume peaked at $600 million on Wednesday, the highest bid list activity in months. Legacy and new issue spreads moved tighter across the board.

CMBS Swap Spreads

Legacy LCF Price and Swap Price Movement

New Deals Prompt Legacy CMBS Sales

Commercial MBS trading in the secondary market picked up sharply this week, as many investors sought to free up cash so they could bid on a wave of fresh paper.

More than $1 billion of bonds were put up for grabs on Monday and Tuesday alone, prompting dealers to speculate that the week’s bid-list volume might exceed $1.8 billion. That would mark a big jump from about $800 million last week and the recent average of roughly $1.2 billion per week, dealers said.

This week’s offerings consisted largely of long-term, super-senior bonds from the benchmark classes of multi-borrower transactions floated in 2006 and 2007. "The trading volume has definitely been elevated with a lot of short-duration paper that [typically] doesn’t move a lot," said one CMBS trader.

Several bid lists had aggregate balances topping $200 million each. The sellers were mostly insurers, asset managers and other buy-and-hold investors, who were expected to sink the proceeds into long-term, higher-yielding bonds from a flood of new issues. Just over $9 billion of CMBS offerings were priced or marketed this week, including $5.6 billion of conduit transactions.

"The ‘real money’ accounts are repositioning themselves and gravitating towards new issues," another trader said. Buysiders saw an opportunity to shift from bonds that are due to mature in two or three years into fresh, long-term paper carrying higher yields. And while new-issue volume is heavy right now, the annual total still isn’t keeping up with the runoff among transactions that priced in the go-go years before the crash, another trader noted.

Most of the offered bonds in the bid-list auctions conducted during the first half of the week did change hands. Word has it that Wall Street dealers submitted the winning bids on a healthy amount of that paper, in keeping with their role as CMBS market makers. There was little movement in benchmark spreads, which was about 60-80 bp over swaps, depending on collateral quality and the securities’ remaining terms.