C&W EDSF Capital Markets Update - October 13, 2017

Download Update

• After the 10-Yr UST bottomed out on September 8th, briefly testing 2%, it has been steadily increasing to the 2.30%s for various reasons including balance sheet normalization in the US and tapering in the Eurozone, optimism around tax reform, modest but generally stable economic data (slow and steady is positive during this cycle), and no bad geopolitical news, primarily focused on North Korea for the time being. While not enough to offset the increase in base rates, we have seen moderate tightening of credit spreads by 5-10 in the last month for the same reasons listed above.
• While the Fed chose to leave the fed funds rate unchanged at 1.00 - 1.25% as expected last month, the median projection for the rate was 1.4% to end the year, implying one more hike is likely. The 2-Yr UST, which is generally considered to be the best indicator for the fed funds rate, recently breached 1.50% for the first time since late 2008. Policy makers see the target rate rising gradually to 2.1% next year, 2.7% in 2019, and to 2.9% in 2020.
• Relative to earlier in the year, there seems to be a lot of positive energy around the real estate equity markets. Quality transactions are attracting more competitive bidder pools. Value-add deals with returns ranging from 14-18% are still the most favored investment strategy. With the wide gap between unlevered returns and the cost of leverage, there are a lot of core and core plus opportunities that provide great relative value which seem to be mistakenly overlooked as many investors focus on a buy it, fix it, sell it strategy.