CMBS enters spring with a roar

Daily Data: Big banks especially went large

Random Walk is trying something new today, which I may or may not stick with, depending on how it’s received:

Two very brief new sections to give you a 10,000ft view of what happened in markets, ingeniously named "Market Recap" and "Other News." 

If it doesn’t matter, I’ll leave it out. 

The goal is a minimalist market daily (which can obviate the need for other dailies, depending on your taste), and provide some context that Random Walk assumes, but does not include. If you get that context elsewhere, then skip it.

Daily Data will continue to be the main event. 

In today’s dispatch:

• Market Recap: pretty much everyone lost (but oil and gold)

• Other News: China and Treasury auctions

Daily Data:

• In the latest annals of Credit Getting Loose, CMBS partied like it’s ZIRP because rate cuts were right around the corner. Oops.

• Some Big Banks really leaned into CMBS

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👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. 

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Market recap

Markets moved downward (especially real estate), and 10-year yields move higher. Why? It was the higher-than-expected inflation print, dashing near-term hopes for a rate cut.

Everybody hurts, especially real estate, but at least there’s Nvidia (and oil)

From RW’s perspective, a 0.1% miss on a composite of surveys is pure noise (even when it confirms my priors). It shouldn’t actually matter much, but apparently it does.

Beneath the surface of the CPI, it’s services (e.g. healthcare and auto-repair) that lead the way (as RW readers would expect), plus a troubling resurgence of energy.

Rising service costs still rising

No surprises there, except for maybe airfare dropping -7% (which is unexpectedly good).

I’ll have to investigate that at some later point.

Other News

• China gets downgraded by Fitch. Apparently China’s unsustainable debt, and plans to stimulate its economy with more borrowing, are an unwelcome mix.¹

  

  Remember, it’s called “dumping” when they do it.

• $39B 10Y Treasury auction suffers from low demand. Investors aren’t eager to lend to Uncle Sam either. Foreign and direct buyers both retreated, while dealers had to take ~25% of the issuance (double their normal share) (via Zerohedge).

  

  The big fella has a lot of borrowing to do, so hopefully just a wiggle.

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Daily Data

Big banks got busy with real estate

Random Walk has written a few times about how there was an awful lot of lending the last couple of quarters, despite the persistence of higher interest rates.

The logic seems to have been:

• “well, the economy is going strong, and rates are coming down soon, so we need to find higher yields somewhere else, so let’s lend to corporates, while rates are still high.”

• For their part, corporates were more than happy to oblige because after a few months of actual tightening, lending tasted delightful.

• The net result was an historic amount of corporate bond issuance, at relatively low prices, and even some riskier stuff like leveraged buyouts and convertibles too.

What was supposed to happen next was that rates would get cut, and investors would continue to chase yield further along the risk curve, eventually bringing sweet relief to the capital starved world of PE/VC, and generally letting the good times roll.²

It seemed odd that investors would be so confident in rate hikes, but perhaps “fake it ‘til you make it” was the best and/or only course. Manifest the rate hikes, or whatever.

Odd or not, that’s what happened (sort of).

Well, the “rate cuts” part still hasn’t happened, but there is more data on the lending bonanza part that preceded the cuts-that-weren’t-yet.

CMBS parties like it’s ZIRP

In this case, big banks got very busy in CMBS issuance, where lending against real estate was suddenly en vogue again.

[$17.8B] issuance during the latest period was the highest it's been since the second quarter of 2022, when $20.56 billion of deals had priced. The average quarterly issuance since 2010 is $17.32 billion, so the latest quarter is par for the course.

1H 2022 is when rate hikes took off in earnest, so in some ways, current lending is right back to where it started (although bigger borrowers are taking the lion’s share).

The change from last year is staggering, and some banks in particular jump out atop the leaderboard.