Against a backdrop of the European Central Bank and the Bank of England working in concert to assure investors they would keep [interest] rates low indefinitely, Wall Street seems to be experiencing something between a “summer swoon” and a bad reaction to a visit to the house of mirrors, as it continues to parse, re-parse, and parse once again the all too numerous statements by members of the Federal Reserve’s hierarchy.

If you have ever visited a house of mirrors at a carnival or amusement park, you may remember seeing your body divided into three or more horizontal plains, each of which seemed able to distort itself separately from its counterparts.

When we look at the “body financial”, we see four plains, individually prepared to be distorted in reaction to the Fed’s future course of action, as follows:

  • Plain 1: If the economy continues to improve, the Fed would begin to reduce its monthly bond purchases (and therefore its stimulus to the economy). This would cause the financial markets to: [fill in the blank].
  • Plain 2: If the economy doesn’t continue to improve (or stalls or sputters), the Fed may feel required to extend its stimulus to the economy. The reaction of the financial markets would be to [fill in the blank].
  • Plain 3: If the numbers are too good, i.e., the reports show the economy growing too quickly, everyone will turn their attention to trying to figure out how fast the Fed will exit the stimulus business. The reaction of the financial markets would be to [fill in the blank].
  • Plain 4: If the reported numbers are weak, everyone will begin to re-think their position regarding the Fed’s next step.  The reaction of the financial markets would be to [fill in the blank].

Stay tuned: we’ll try to fill in the blanks as soon as we can. 

Monday’s Numbers

The Trepp survey for the period ending July5th showed spreads widening three +/- basis points as lenders wait for the yields on Treasury securities to settle into a holding pattern as the market is unsure how to react when 10-year Treasuries have increased 60+/- basis points in a one month period. The “frothiness” seems to be being drained from the market as lenders wait for the markets to settle down.

Asking Spreads over U.S. Treasury Bonds in Basis Points
(Ten-Year Commercial and Multifamily Mortgage Loans
with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

7/5/13

Month Earlier

Office

342

214

210

210

179

174

Retail

326

207

207

192

169

163

Multifamily

318

188

202

182

158

151

Industrial

333

201

205

191

163

159

Average Spread

330

203

205

194

167

162

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.73%

2.10%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads will be updated in next week’s issue of Monday’s Numbers. 

10-Year Fixed Rate Commercial Real Estate Mortgages (as of May 2, 2013)

Property

Maximum
 Loan-to-Value

Class A

Class B

Multifamily (Agency)

75% – 80%

T +195

T +200

Multifamily (Non-Agency)

70% – 75%

T +190

T +195

Anchored Retail

70% – 75%

T +210

T +220

Strip Center

65% – 70%

T +230

T +240

Distribution/Warehouse

65% – 70%

T +210

T +220

R & D/Flex/Industrial

65% – 70%

T +235

T +240

Office

65% – 75%

T +200

T +215

Full-Service Hotel

55% – 65%

T +265

T +290

Debt service coverage ratio assumed to be greater than 1.35 to 1.

 

Year-to-Date Public Equity Capital Markets

DJIA (1): +18.01%
S&P 500 (2): +17.81%
NASDAQ (3): +119.24%
Russell 2000 (4): +22.03%
Morgan Stanley U.S. REIT (5): +8.81%

 (1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/11

12/31/12

7/13/13

3-Month

0.01%

0.08%

0.03%

6-Month

0.06%

0.12%

0.07%

2-Year

0.24%

0.27%

0.34%

5-Year

0.83%

0.76%

1.42%

7-Year

1.35%

1.25%

2.07%

10-Year

1.88%

1.86%

2.58%

                                              

Key Rates (in Percentages)

 

Current

1-Yr. Prior

Federal Funds Rate

0.01

0.18

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

U.S. Unemployment Rate

7.60

8.70

1-Month LIBOR

0.19

0.25

3-Month LIBOR

0.27

0.46