CMBS Stumble

August 3rd, 2017 9:41 am

Via Bloomberg:

Grocery CMBS Stumble Suggests Repricing After Amazon-Whole Foods
2017-08-03 11:56:49.192 GMT

By Adam Tempkin
(Bloomberg) — Investors gained concessions on the first
commercial mortgage bond backed by grocery-anchored centers
since Amazon announced it was buying Whole Foods Market,
suggesting a repricing of CMBS risk after that transformational
* Spreads on the bond, sold by Madison International Realty and
the REIT DDR Corp., widened considerably from initial guidance
* “Amazon buying Whole Foods has certainly brought grocery-
anchored centers into focus from a longer-term viability
standpoint,” Principal Global investors wrote in a 2Q CMBS
market review
** In addition to pressure on the sector from Amazon, foreign
entrants Aldi and Lidl are making a push to increase their
footprints in the U.S., adding more competition to the grocery

The bond was comprised of several pools, and some may have
fared better than others based on the strength of the loans
backing them. The A and B pools, for example, had significant
spread widening at pricing versus initial guidance, while pool C
* Pool C was comprised of centers anchored by Publix Super
Markets that are performing very well and hold little rollover
risk on the leases, according to presale reports from
Morningstar and S&P
* Some of the stores in Pools A and B were slightly weaker,
according to Morningstar presale, and therefore more likely to
face renewal risk in a normal scenario
** Pool A roster included Publix, Kohl’s, Ross Dress for Less,
and Bealls; some of the centers are in secondary or tertiary
*** Scheduled Publix rollover was a big concern of Morningstar;
even more concerning, sales for three Publix stores were below
the company’s national chain average of $637 per square foot
*** “The Publix Supermarket at Skyview Plaza in Orlando,
Florida, is considered to be in a primary market, but sales are
$310 per square foot, which is low for a grocery anchor”
** In Pool B (comprised mostly of power centers, large outdoor
shopping malls with “big box” stores), both junior-anchor and
in-line sales for certain properties have “decreased since
2013,” Morningstar says, which may mean decreased foot traffic
*** Properties in Pool B include Kohl’s and Bed Bath and Beyond,
which both face challenging traffic patterns
* Loans across the three pools underlying the bond weren’t
cross-collateralized or cross-defaulted, meaning they are all
separate and have distinct collateral, although there may be
some common management of properties
* Citigroup and Morgan Stanley were co-leads on the deal, CGCMT
2017-MDRC. A spokesman for Citigroup had no comment. Morgan
Stanley did not respond to requests for comment
* NOTE: Grocery stocks stumbled after the purchase was announced
on June 16

To contact the reporter on this story:
Adam Tempkin in New York at
To contact the editors responsible for this story:
Christopher DeReza at
Adam Tempkin

Only Perfect Hedge Is In a Japanese Garden

July 18th, 2017 10:24 am

This is an interesting piece from Robert Sinche at Amherst Pierpont on the changing relationship between US 10 year and Eurpean govies on a hedged basis. The US is looking less attractive.


Via Robert Sinche at Amherst Pierpont Securities:

One of the persistent sources of support for US Treasury debt, particularly at the longer end of the yield curve, was its relative “high yield “ status. Throughout 2015 and 1H2016 the yield of the 10-year Treasury exceeded the hedged yield (using a conventional 3-month hedge) of 10-year bonds in other developed countries. The dynamics of the hedged-yield analysis is driven by yield curve shapes, with a flattening yield curve in the US making the effective hedged yields in foreign markets more attractive.  As a result of the steepening yield curves across the EZ and UK, the hedged yields on benchmark 10-year bonds in France (2.82%), Germany (2.55%) and the UK (2.45%) now exceed the 2.29% yield on the 10-year Treasury. While hedged yield analysis is not the key driver of bond yield movements across markets, the shifting yield curve shapes and yield back-ups across Europe does remove one source of support for US debt compared to alternative global bonds. The flatter yield curves in Canada and, particularly, Japan, continue to leave their benchmark bonds relative unattractive based on a hedged-yield comparison.

Delinquent CMBS Creeping Higher

July 17th, 2017 12:28 pm

Via Bloomberg:

CMBS Monthly Late-Pays Spike Most in Six Years, Still Low: Fitch
2017-07-17 15:49:57.920 GMT

By Adam Tempkin
(Bloomberg) — U.S. CMBS loan delinquencies increased 22bps
to 3.72% in June from 3.50% a month earlier, the largest month-
over-month spike in six years, Fitch said in a statement.
* This represented largest monthly increase in delinquencies
since the 9.01% peak in July 2011
* Silver lining is that halfway through 2017, loan delinquencies
so far remain considerably below Fitch’s estimate of between
5.25% and 5.75%
* Primary reasons are strong repayment activity of maturing
loans during the first six months of the year, many of which
were previously identified as highly leveraged and would face
difficulty refinancing
* Remainder of the year looks promising with only $20b left to
refinance in 2017 and new issuance still healthy
* Fitch lowering its year-end forecast to between 4.25% and

Some Fed Policy Analysis

June 12th, 2017 8:06 am

Excellent piece via Chris Low at FTN Financial:

AM Economic Comments

by Chief Economist Chris Low

Monday, June 12, 2017

Stocks are lower in Asia and Europe overnight and NASDAQ futures are down enough this morning to suggests Friday’s tech selloff will continue today. US 10-yr note yields were higher overnight but have fallen back to 2.209%, likely in part thanks to the weakness in equities.

The front page Fed-vs-the-financial markets article in today’s WSJ dives into what ought to be the most controversial reason the Fed is raising rates this year: They have decided stocks are overvalued and they can’t stand when long-term interest rates fall when they raise short rates. The paper notes the Goldman Sachs Financial Conditions Index, which has fallen considerably since December, suggesting markets have eased more than the Fed has tightened. The GSFCI is just exactly the sort of thing the Fed loves to watch while tightening because it allows FOMC participants to ignore the economic damage they are doing to real world economic activity.

There is so much wrong with the contention that financial conditions are easier than they were before the last two rate hikes it is hard to know where to begin, but let’s start with the fact that the Fed appears entirely in agreement with the WSJ. As far as predicting what the Fed will do, the drop in the GSFCI significantly raises the odds of more aggressive behavior. After all, NY Fed President Bill Dudley cited the GSFCI two weeks ago, right before the Fed’s communications blackout, saying there is no reason to think the Fed has tightened too much if financial conditions are easing. Dudley is the Fed’s go-to financial-markets guy.

Next, Mohamed El-Erian and others have been popping up on TV lately citing financial stability as the reason the Fed is tightening. Last week, El-Erian said long-term rates are falling because too much income is going to rich people, and rich people are too prone to invest rather than spend. It rings true because 1. We all know about the income gap and 2. It is fun to think rich people are stupid. Be careful, though. El-Erian’s logic smacks of the same reality-defying thinking as the global savings glut baloney Greenspan popularized in the late Nineties and Bernanke clung to in 2006 as excuses for ignoring a flattening yield curve. People who extended maturity back then knew exactly what they were doing and they likely know what they are doing now, too.

In the meantime, even as the Fed thinks financial conditions have eased despite three rate hikes, business loan growth has slowed significantly. Commercial and industrial loans, which are made at floating rates above fed funds, are lower than they were in October. Mortgage activity has slowed and home equity lending is declining. Delinquencies are rising and lending standards are tightening in response. When the Fed raises interest rates they tend to kill floating rate borrowing first, which makes sense since they raise short-term rates. Money moves into the long end because investors are confident the Fed will check any inflationary tendencies in the economy and because long-yields are the place to be when the Fed (inevitably) tightens too much.

The GSFCI falls when the Fed tightens because it fails to recognize a flat yield curve as a sign of tight financial conditions. In the index, the drop in long yields offsets the rise in short rates. The GSFCI was very low in 2007, for instance, a year in which millions of borrowers were driven into default. And the Fed, watching things like the GSFCI instead of real-life activity in the financial sector – you know, like lending and borrowing activity – failed to recognize how tight financial conditions were in 2006-07. In fact, they did not just fail to recognize it at the time, FOMC participants failed to admit excessive tightening even three years later, in the aftermath of the worst credit crunch since the Great Depression.

The Fed will raise rates on Wednesday, and again in September and/or December, despite a sharp slowdown in credit activity because FOMC participants have a weak spot for indicators like the GSFCI and because they are all-too eager to believe in global savings gluts and the stupidity of rich investors as an alternative to the possibility the fed funds target they arbitrarily chose when they started tightening is too high.

Today, the May Treasury budget. This week, PPI, CPI and May retail sales.

Chris Low

Comments on Possible Fed Appointees

June 3rd, 2017 9:51 am

Via Stephen Stanley at Amherst Pierpont Securities:

GOP Collapse in Reddest of States

May 11th, 2017 8:23 am

This story is via the left wing website DailyKos ( I do not agree with the site’s politics  but if you want a deep dive into elections it is worth a visit.


Via the DailyKos:

Daily Kos Elections Morning Digest

Leading Off

Special Elections: On Tuesday night, voters in two counties on the eastern outskirts of Oklahoma City cast ballots in a special election to fill a vacancy for Oklahoma’s 28th State House District, a seat Republicans should have held without so much as an eyeblink: Donald Trump carried it by a monster 73-23 margin in November, even better than Mitt Romney’s 69-31 win four years earlier.

So what happened? Republican Zack Taylor, the owner of an oil and gas company, eked out just a 50-48 victory over attorney Steve Barnes, his Democratic opponent, a difference of only 56 votes. That is, simply put, a stunning collapse: Trump won by 50, yet Taylor squeaked through by just 2—a 48-point fall. By contrast, former Republican state Rep. Tom Newell, whose resignation created this vacancy, easily won re-election last year 67-33.

We’ve almost never seen anything this dramatic, but the outcome fits into a pattern we’ve witnessed ever since Trump’s win last year. Nationwide, there have now been a dozen races pitting a Republican versus a Democrat in legislative and congressional special elections, and in nine of them, Democratic candidates have performed better than the 2016 presidential results.

As we’ve noted repeatedly, this is a remarkable development. For years, Democratic turnout has struggled mightily when there’s no presidential race on the ballot. Indeed, one thorough study examining elections that took place in 2013 found that Democrats tended on average to perform 12 points worse than Barack Obama had just the previous year. Now the exact opposite is happening.

Of course, every race has unique elements, and in Oklahoma in particular, a savage and unresolved budget crisis presided over by the GOP has soured many voters on Republicans. And not every election has moved toward Democrats (Republicans simultaneously held on to the mayor’s office in Omaha, Nebraska Tuesday night) or augured for future gains (Democrats picked up two dark red legislative seats in Oklahoma special elections last cycle but didn’t do well in the fall).

But the one common thread to all of these elections in every state is, of course, Trump. His outrages continue to fire up Democrats everywhere, and his latest—his efforts to repeal health care and his sacking of FBI Director James Comey—will only take things to new heights.

We’ll continue to monitor these races to see whether this pattern holds, and we have several upcoming contests to watch, including special elections for Congress in three states, as well as another legislative special election in Oklahoma in July, near Tulsa. But Tuesday’s election in the Sooner State suggests there’s no sign this surge will abate any time soon.

Firing Comey and Trump Agenda

May 10th, 2017 11:08 am

This is an interesting collage of analyst opinions on the firing of FBI Director Comey and the impact that action will have on the Trump legislative agenda.

I think the Watergate comparisons are hyperventilating hyperbole. Watergate had been a dominating  from March of 1973 and the so called Saturday Night Massacre was in October. There was a Select Committee chaired by Senator Sam Ervin which produced the John Dean ” cancer on Presidency” narrative and there was Alexander Butterfield and his bomb shell disclosure of Nixon’s taping system. There was significant evidence that Tricky Dick was a crook.

In my opinion we have nothing remotely analogous to that body of evidence this time.


Here is the Bloomberg article:

Comey’s Firing May Suck Oxygen From Trump’s Agenda: Street Wrap
2017-05-10 13:46:39.346 GMT

By Felice Maranz and Brian Chappatta
(Bloomberg) — Donald Trump’s abrupt firing of FBI Director
James Comey is raising questions about whether the president’s
pro-growth, tax-cutting agenda will stall as the focus shifts to
why Comey was dismissed amid probes into possible Russian ties
to Trump’s campaign.
* Stocks were little changed in early trading, with the S&P 500
down less than 0.1 percent at 9:45 a.m. in New York

COMPASS POINT (Isaac Boltansky, in email to Bloomberg)
* Comey’s firing is unlikely to sink Trump’s agenda, but surely
slows it, as dismissal now becomes the focus on Capitol Hill
* Congressional Republicans still want tax reform, and they’ll
work toward that goal — but decision distracts from legislating
and further muddies the agenda; Republicans “have to be
befuddled” that White House refocused attention on this issue
right after they’d finally secured “some modicum of momentum” in
wake of AHCA passing
* In note to clients, Compass Point writes timing is
“inconceivably curious,” political ripples will further
complicate Trump’s Congressional agenda

COWEN (Chris Krueger)
* “EVERYTHING just got more challenging on Capitol Hill”;
situation is “almost unimaginably fluid,” with more questions
than answers
* Sees Comey dismissal as likely to consume most of the oxygen
in Washington for foreseeable future, with any momentum from
House health care passage having gone up in smoke
* Sees “bigly problem” for White House and all Republicans; hard
to see any political and policy upside; watching key House and
Senate Republicans on appointment of special prosecutor or
bipartisan committee to investigate; sees Oct. 1 as likely hard
catalyst, with Democrats possibly demanding special prosecutor
or triggering govt shutdown

* Comey’s firing will likely end up being “a political story for
the ages and cocktail party outrage fodder,” but Trump will
probably stay in the Oval Office, legislative agenda will be
* Notes Sen. Lindsey Graham, usually a thorn in Trump’s side,
was quick to praise the president (good sign for avoiding party
revolt); sees “little more than crocodile tears” for Comey on
both sides of the aisle, while Trump probably moved too quickly
to let issue impact 2018 midterms or his own reelection
prospects in 2020
* House is unlikely to initiate impeachment; notes effort to
craft ACA repeal/replace that can get 50 Senate votes plus
Pence’s continues, as does work on FY2018 budget resolution, tax

FTN (Jim Vogel)
* Sacking FBI Director Comey took the U.S. by surprise; optics
might be worse for overseas investors, with buying in UST
immediately after London open to erase Tuesday’s sell-off
* Equity futures aren’t “shaken or stirred” by the news,
however, leaving large domestic accounts to sort through the
fallout; both stocks and credit spreads are susceptible to
* Based on available information, firing Comey shouldn’t have
long-run implications for bond prices, as key economic questions
revolve around who puts their stamp on legislation – White
House, moderate Congressional Republicans, or Freedom Caucus
members; those dynamics were in place before FBI changes

BMO (Ian Lyngen, in phone interview)
* “It’s unclear whether this matters more than the last several
iterations of the Trump dysfunction, but it’s clear that this
adds another level of complexity beyond simply the Washington
* “I know the market is nervous about it, but I haven’t heard
anyone say that this is a material change in the way people are
thinking about the administration”
* “For the Fed, I don’t think this would take out a June hike,
unless there’s something really dramatic or unseen”
* In earlier note, BMO said the Treasury market benefited from
the political uncertainty triggered by Comey’s abrupt firing;
BMO cognizant that technical indicators are simply a reflection
of the risk-off move inspired by dismissal, but argues selloff
had extended to extremes that left it susceptible to headline-
driven reversal

* Puzzled by timing, though thinks will end up “going away”
* Sees Comey’s ouster as yet another distraction from progress
on public policy that could support economic growth
* “Every moment of every day that we have to hear about Trump
hiring lawyers to attack anyone who questions him on Russia,
Democrats screaming that this is a constitutional crisis, and
GOP flaks saying, ‘What about Hillary’s emails?’ is yet another
roadblock to getting tax reform and stimulus done”

TD SECURITIES (Gennadiy Goldberg, in email to Bloomberg)
* “We’ll have to see more of the fallout from the Comey firing
to gauge whether the broader legislative timeline has been
* Also worth keeping in mind about half of the FOMC hasn’t
penciled in any substantial fiscal stimulus into projections, so
tax reform and infrastructure spending are not necessarily
prerequisites for Fed to hike rates another 2 times this year

Related earlier stories:
* Equity Group’s Sam Zell on Bloomberg TV asks, ‘What Took Trump
So Long’ to Fire Comey? See video
** “Mr. Comey voluntarily or otherwise got himself involved in a
whole bunch of stuff. So he was a wounded animal to begin with
so the only question I’d ask is what took Trump so long?”
* Markets Should Forget Comey and Focus on Fundamentals: Macro
* Comey Ouster Threatens to Backfire on Troubled Trump White
* Is This Trump’s Saturday Night Massacre? Don’t Count On It.
This president isn’t Nixon and Washington isn’t lined up against
him: Politico

Resistance Broken

April 13th, 2017 5:46 am

This is an excerpt from a piece written by Steve Feiss of Government Perspectives. The excerpt summarized dealer views on the break of resistance on the 10 year note at 2.28/2.30 and what that signals for the near term course of interest rates. If you have Twitter you can follow Steve Feiss  @stevefeiss.

Via Steve Feiss at Government Perspectives:

Ø  CitiFX Weekly RoundUp: Sacre Bleur. To parity and beyond? … and on US RATES (“flip a coin”), “The 2.30% area we have been highlighting on US 10s is now coming under pressure. Our medium to long term bias of higher US yields remains unchanged; however, the question is whether the base is in from which we will move higher or whether a broader decline (position flush out) will first be seen before higher levels later in the year. Unfortunately, for the time being, the answer to that question remains elusive and we would like to see further developments to take a view one way or the other. A weekly close below 2.30% on US 10s would be the first sign that lower levels are likely in the short-term. Further confirmation comes if yields across the curve also take out key supports (e.g., below 1.80% on US 5s and below 2.90% on US 30s). It is worth waiting for such a development to materialize, though, before expecting the next move in US yields to be lower.”

Ø  CSFB: from SHORT to stopped OUT and buyer of dips (both 10s AND 30s). Chart of day – 10y yields, “have broken key resistance at 2.31/29%, which sets a yield top. We look for a move to the 38.2% retracement of the 2016 yield rise at 2.18/14% next, potentially 2.01/1.98%.” And on 30s, “have broken key resistance at 2.90%, which establishes a yield top to target 2.78/77%.”

Ø  GS (on 10s, and BEs): “U.S. 10-year yields have broken 2.308-2.29% support. The area has been in focus for some time now, as the place to watch for signs of a base. Having now broken clear through it, chances are even greater that the market really has put in 5-waves at the March high. This allows room for a protracted corrective period, one which could last another 2-3 months, into June/July. In terms of next support, there’s a minor gap up from Nov. ’16 that comes in at 2.166-2.15%. The next level thereafter is 2.135% (38.2% retrace of the initial advance from July). View: Initially see support at 2.166-2.15%. Thereafter 2.135%. Likely messy/overlapping for another 2-3 months.”

Impending Debt Crisis

April 12th, 2017 6:48 pm

Via UK Telegraph and Ambrose Evans Pritchard:

Dealing With Debt

April 12th, 2017 12:28 pm

Carmen Reinhart spoke yesterday at Harvard (where she teaches) and one of my contacts summarized her comments:

·         The debt overhang in Europe will act as a constraint on ECB policy and she expects no action by the ECB this year (although they will need to announce something about the current Asset Purchase Program which is set only through December).

·         Target 2 (T2) balances, which represent claims on the financial systems within the EZ (banks in Greece lost deposits to banks in Germany, so the Central Banks must square up these flows) are an representation of FX rates within the EUR. In other words, if there were floating exchange rates within the EUR the large capital outflow from Greece, Spain and Italy, among others, would have forced devaluations of their currencies and the capital flight into Germany a revaluation of its (non-existent) currency. The large magnitude of these T2 balances represents the imbalances built up within the EZ, with no FX outlet.

·         Given the lack of flexibility within the EZ, she expects there eventually will be more restructuring of debt, with Greece (shorter term) and Italy (longer term) the ones to watch.

·         Regulatory policy implementation after the financial crisis was (partly) designed to encourage broader holding of government debt, a policy that helped finance the huge surge in fiscal deficits.

·         Japan still is a very difficult fiscal situation as the (aging) voters will not vote to cut entitlements or raise taxes to fund them. As a result, she expects low/negative yields will persist for a long time as a way to “tax” savers through negative yields to help fund the debt and effectively reduce the debt burden, a theme that is key to her views across the developed world rate markets for many years to come.

·         Growth is a very good way to deal with excessive debt, and she does expect some reduction of regulatory burdens as a way to increase potential/trend growth rates which are too low to finance debt loads. But that improvement, while welcome, is unlikely to be sufficient over the long term.

·         At Jackson Hole last year BOJ Gov. Kuroda opined on why the world continues to gravitate to the JPY and JGBs in times of global stress given Japan’s massive debt burden and lack of inflation and nominal growth.  To be sure, Kuroda was “talking his book” as he would prefer a weaker JPY, but there is a logic to Japan being one of the worst fundamentals situations in the G7.

·         On the US, she fears the combination of stimulative FP and tighter MP would drive the USD higher…and the Trump Administration would be extremely displeased. Given that she views there is little appetite for a Plaza Accord type arrangement on FX rates, she expects the Fed to tread carefully in hiking rates – 3 hikes this year, at most, in her view.

·         When asked about her views on next Fed Chair, she noted the lack of respect for academics in the current Administration (still no Chair of the Council of Economic Advisors). As a result, she expects a “business type” as next Fed Chair. Her original strong expectation was Kevin Warsh, but she worries he might be viewed as too academic, although he is not. Other names now include, in her view, Gary Cohn, Bill Dudley (known quantity and, after all, he WAS a GS guy) or Jamie Dimon. Economics PhDs need not apply, apparently.

·         Finally, she does NOT believe the impact of the financial crisis is behind us (and the world). Smart regulatory reform and tax policy adjustments could increase potential/actual growth, but the debt overhang in the developed world will be an issue for years to come. There are ways to deal with debt overhangs, which include strong growth (unlikely, esp in EZ and Japan), spending cutbacks, esp on entitlements (good luck), higher inflation (trying, but no progress…so far) and continued financial repression (negative real interest rates), with the latter likely to be a persistent development, particularly in the EZ and Japan.