Last week, market activity was slow due to the Thanksgiving holiday. Two- and 10-year Treasury yields came up 10 and 7 BPS, respectively. Uncertainty about the cumulative impact of monetary tightening remains, which continues to influence the Federal Open Market Committee’s (FOMC) “wait and see” approach. Since their last meeting, the 10-year yield has fallen 50 BPS, the labor market has tightened, and inflation has seen its downside. Due to these signals, it looks like we’ve seen the end of the FOMC’s rate hikes. However, based on the Fed’s meeting minutes that were released last week, there appears to be a dichotomy between market expectations and the Fed’s promises. It remains unclear when they’ll begin cutting the rates – this depends almost entirely on inflation. The question everyone is asking: Will the Fed’s cut rates when they near their inflation target or hold steady?
This week we have Gross Domestic Product (GDP) to watch on Wednesday, Personal Consumption Expenditures Price Index (PCE) on Thursday, and Institute for Supply Management Price Index (ISM) on Friday. Core PCE is the inflationary measure that the Fed watches most closely. There are also several TSY auctions (about $150B) early this week between the 2- and 7-year sectors and a speech from Powell on Friday that will be worth watching.
It was also a quiet week on the macro level. There are a lot of hawkish members of Congress looking for dramatic cuts to spending. It’s tough to imagine them coming to an agreement. We may be in for a brutal fight with no middle ground.
The average commercial mortgage-backed securities (CMBS) coupon through Q3 has been about 7%, with term averaging between 85-90 months, loan-to-value (LTVs) below 55% and debt-service coverage ratios (DSCR) between 1.90 and 2.0.
We will provide insights on how Q4 is performing as we learn more.
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