Today's Wall Street Journal Reported today in an article by Sudeep Reddy, Mark Whitehouse, and Kelly Evans:
- "Futures markets, in a reversal, now bet that the Federal Reserve is almost certain to cut its key interest rate, now at 5.25%, by a quarter-point before the end of the year."
- "Mark Kiesel, a corporate-bond portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., estimates that the backlog of unsold bonds and bank loans exceeds $300 billion -- a situation he sees as similar to that in the housing market, where the backlog of unsold homes has also reached new highs. At June's rate of existing home sales, it would take 8.8 months to unload all the houses on the market -- a 15-year high."
Brad Anderson, of Wells Fargo Commercial Mortgage, sent me some interesting info on the CMBS market and the impact it is having on Conduit Lenders and borrowers.
- Because of the heavy supply and the weak demand for CMBS by hedge
funds and other institutional investors the spreads charged by the
conduits to borrowers have soared in the last week. A typical
conduit loan on a Self Storage deal is likely to be priced at 180 basis
points over the treasury yield. This represents a 50 basis point or one-half percent increase in
interest rates to the borrower over the last week. According to Brad there is $58,658.60 MM
in CMBS supply hitting the market in the third quarter.
It looks like higher spreads are hear to stay for a while.
A silver-lining and possible white knight
- Treasury yields have dropped over the last week to somewhat offset the increase in spreads. Treasuries yields dropped 17 basis points over the last week to close at 4.79%. This is down 41 basis points from the July high of 5.20% on July 6th.
- The WSJ reported today that some hedge funds that have not been hurt by the sub-prime mortgage fiasco and the volatility in the bond market are stepping in to buy bonds because of the more generous yields.
- These new entrants, although acting opportunistically, are bringing an additional level of liquidity to the debt markets at a time when liquidity is sorely needed. If this trend continues, it may help stabilize the CMBS market as well.