HFF Research Update for Feb. 22: SWAP Spreads Compress, Cap Rate/Mortgage Spreads Remain Low & Lean

Wednesday, February 22, 2017

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

In the 2017 HFF Capital Markets Overview, we discuss themes for the year including political uncertainty and its impact on sovereign bond yields and currencies. As the French election results grow more opaque and British Parliament discusses Article 50, the Euro has moved to its lowest value relative to the USD in more than 30 days. Meanwhile German short term debt is in demand, driving yields to record lows below zero percent.

European unpredictability is allowing the yield on the 10-year UST to benefit from a “range-bound” trajectory, trading in the narrowest 30-day bandwidth since last summer.

Thankfully, yields on the UST have cooled from mid-month highs of approximately 2.5 percent and are currently below 2.4 percent. Meanwhile, corresponding SWAP yields have not declined concurrently. As corporations issue near-record levels of bonds, securing low interest rate financing, SWAP spreads have thus compressed to near equilibrium (see highlighted boxes in the rates table below).

Given renewed confidence in the length and pace of the economic cycle, investors have responded to that near-record level corporate bond issuance with aplomb, keeping yields on the paper at reasonable levels relative to the 10-year UST. In fact, both the BBB and equal-weighted A/BBB remain near all-time lows relative to the 10-year UST, providing excellent “pressure” on both capitalization rate and mortgage credit spread proxies.

Sources: HFF Research, Bloomberg, United States Treasury, HSBC

Footnote: Corporate bond spreads are adjusted one day post-closing, Cap Rate Spread = 10-year BBB less 10-year UST, Mortgage Credit Spread = equal weighted 10-year A/BBB less 10-year UST

About Jimmy Hinton

Jimmy Hinton serves as managing director of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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