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Brexit Rattles Markets, Forcing Equities Lower; CMBX/CMBS Wider

What would have normally been headlines on Friday turned out to be mere parentheticals in light of the fallout from Thursday’s Brexit vote.

One of the two stories that were largely overlooked was a much weaker-than-expected durable goods orders, which by itself might have given the Fed more pause over whether to raise rates this summer. On the positive side of the ledger, all 33 of the top US banks passed the quantitative portion of their stress tests. The results were released after the market closed on Thursday, with many banks passing by large margins despite the stress tests being even more rigorous than prior years.

As noted, however, Brexit was everything on Friday and the impact of the “leave” vote was swift and severe. On the equity front, European stocks fell more than 8% on Friday while US stocks fell more than 3%. Yields on US Treasuries fell sharply with the yield on the 10-year dropping 17 basis points to 1.57%. Bank stocks were pounded on Friday with that segment of the equity market losing more than 7%.

Looking at Sunday night/early Monday futures, it looked as though US and European stocks were slated for a negative open (although, the losses looked to be a fraction of what they were on Friday). As of 5 AM today, the 10-year yield was down another 10 basis points to 1.47%.

As for CMBS and CMBX on Friday, spreads predictably blew out following the Brexit news. By the time the dust settled on Friday, CMBX 6/7/8/9 AAA spreads were wider by five to six basis points; CMBX 6/7/8/9 AA spreads were out 17 to 19 basis points; CMBX 6/7/8/9 A spreads were out 18 to 22 basis points; and CMBX 6/7/8/9 BBB- spreads were out 30 to 40 basis points.

In the cash market, it wasn’t a complete shutout as some bonds traded. Still, trading was light. Cash spreads tracked CMBX with new issue AAA last cashflow bonds out about five basis points and BBB- paper out 30 basis points. (To be sure, CMBX/CMBS spreads were even wider at some points during Friday’s session.)

So what does this mean for the CMBS market looking in the short- and medium-term?  Our guess is that in the short-term, we go back into a February-like hibernation for new issuance. Until the markets settle, spreads stabilize, and we get a sense of what everything means for the rest of the Eurozone, we would expect new issuance to slow once again and for desks to be careful in their lending quotes. Over the medium term (let’s say from September to December), the lower Treasury rates could be a modest net positive for CMBS lenders in terms of market share. With insurance companies not loving the low absolute yields, CMBS rates could look attractive to some until risk retention kicks in later this year. Lastly, there could be some flight to quality for US real estate assets that helps buoy the trophy asset market.  We’ll see what happens.


Compliemnts of Trepp, LLC – A member of the EACC.