C&W EDSF Capital Markets Update - August 12, 2019

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On August 21st, 2019

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C&W EDSF Capital Markets Update - August 12, 2019

Market Commentary

USTs are down 30-40 bps in the last two weeks primarily driven by an escalating trade war between the US and China that has spread from tariffs to currencies and secondarily by the "insurance" cut by the Fed. There are varying opinions on why the Fed cut rates including trying to keep the economy going and inflate inflation to reaction to the debt markets given how low long term rates are or a continuously weakening global economic data. Unfortunately for the Fed, long-term interest rates have fallen further than their short-term rate cut, inverting the yield curve to an even greater extent. The last time the Fed cut rates while the market was thriving was January 1996 which extended economic growth for another 2-4 years.

While historically spreads would have likely blown out in step with base rate drops, spreads currently, even in this period of high volatility, have widened out approximately 15-20 bps. Fixed-rate financing is widely available in the low-to-mid 3%s right now at modest leverage levels. Financing up to 75% +/- is also available sub-4%. Life insurance and pension fund lenders continue to react to this low interest rate environment. While earlier in the year interest rate floors were generally in the 3.50-4.00% range for most portfolio lenders, those floors are getting reassessed regularly and most groups have updated floors of 3.00-3.25% for 5-10 year loan terms.

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