Let's Talk Loans - Vol. 70

Welcome. My apologies for missing last week. I'm in the middle of an absolute travel gauntlet throughout the month of October, into November and last week was our fiscal year end. The good news is I'm having more interaction face to face with clients which I find incredibly insightful and gives a true boots on the ground feel for what you're up against. The bad news is I'll sleep in a hotel bed more than my own. That said, I can tell you travel remains vibrant. Planes are full. Hotels are packed. Skyclubs have waiting lines (and botched SkyMiles changes). Conferences have strong attendance. I know there was the worry that business travel would fall off a cliff once the summer ended but for the moment I do not see that occurring. If you're new to the newsletter, we're here to talk about what's trading and trending in loans. We also have a healthy discussion about banking and the balance sheet. I hope you enjoy the commentary.

First off, it's not often you get an entire stadium to yourself and get to eat near a pirate ship. That was the scene this week in St. Petersburg at Raymond James Stadium for the Raymond James CEO Roundtable . Our investment banking team was joined with more than a dozen of the best CEOs in the country at our corporate headquarters. A really unique experience and I send my thanks to John Roddy , Steve Raney and Paul Shoukry for the invitation to chat with our clients on various lending topics.

Next, I'd like to congratulate ACUMA (American Credit Union Mortgage Association) and Peter Benjamin, CMB? for a lovely conference in National Harbor just outside of Washington DC. We've attended and been a member of ACUMA for nearly a decade now. I was told this was their 2nd largest attendance on record. Considering it was mortgage based, and the state of the mortgage market, you would think attendance would be low. Not the case here. Great content, vibrant atmosphere. I was thrilled to have a packed room for my particular session on growing your mortgage business. We discussed alternative origination products. DSCR, bank statement, asset depletion, jumbo, HELOC, closed end seconds and more. You've got to get creative in a market like this but also keep an eye on credit. Those of you in the throws of budget season, it was a helpful presentation with forecasts, guidelines and a look at the credit union industry balance sheet. I hope you enjoyed the discussion!

Now on to the news of the day. About that jobs number. JOLTS came out earlier this week and "surprised" everyone that the economy is still strong. Today's number reiterated that fact and moved the entire yield curve up 10bps. I'm surprised the move hasn't been greater.

We've spoken at length about the spread inversion between 2s and 10s. Earlier this year we reached multi-decade highs on that inversion when the SVB mini banking crisis crested back in early March at 108bps. We tested that again in July bouncing off that 108bps inversion. Most of the pivot hopeful desperately believed that we would get the cuts necessary to drop the short end down and bring us back to a more normally slopped yield curve. The opposite has happened since September 20th which has been nothing short of breathtaking. The 10 year has gone on a 40bps upward sprint while 2 year has hovered around 5.05% compressing that inversion to only 27bps as of this writing. It's the long end that's risen to the short end. Not the short end dropping below the long end. Not what you wanted to see I'm sure and is creating issues for borrowers and lenders alike.

2s and 10s below

Spread between 2s and 10s below

With the 10 year approaching 5%, mortgage rates have also spiked. Not long ago we were lamenting 7% mortgages. Sadly, now we are close to 8% mortgages . The spread between the 10 year treasury and 30 year fixed rate is also at a decade high. Driven largely due to the Fed no longer buying MBS and banks pulling back from the space - the two largest buyers of the product in the world have exited the market. That's caused a 300+bps differential between the two, and with the 10 year at 4.78% we should see 8% mortgages very soon.

Autos are feeling similar pressure. Per the Financial Times, 1 in 5 car payments are now over $1,000 a month. It wasn't that long ago we considered that a mortgage payment, not a vehicle payment.

"The interest rate on loans averaged 7.4% in the third quarter, the highest it has been since 2007, according to car research group Edmunds. The average monthly payment of $736 was a record high, while the share of car buyers paying at least $1,000 a month reached nearly 18%."

The balance sheet is also under pressure as a result of higher rates. The concept of AOCI is back in focus and worries are forming that another SVB event could occur with interest rate risk losses growing.

"Paper losses on the most opaque part of US banks’ bond portfolios are now close to $400bn — an all-time high, and 10 per cent above the peak at the start of the year that caused the collapse of Silicon Valley Bank."

“We are watching this?.?.?.?very carefully to see if something breaks.”

"But the implosion of midsized US lender SVB in March refocused the minds of regulators and investors on the risks lurking in bank bond portfolios."

Lastly, it feels like the world got a bit more frightening this week. For much of this year I've studied and hunted for good news as to how we will endure higher for longer but not see the world break. We dodged the government shutdown last week only to see the Speaker of the House lose his job for it. The political climate we live in continues to get more tribal. Rising oil prices is a tax on all consumers. The risk of stagflation. My above comments to AOCI and the possibility of another mini banking crisis. Growing budgetary deficits and interest expense really start to hurt with rates at these levels. An aggressive Fed that is prone to over correcting can do real damage. Good news in the economy causes rates to stay higher for longer but the longer rates are higher the more likely something in the market goes boom.

Mohamed El-Erian is a name I follow very closely. He's been glass half full where most have doomsayers and he's been right that the Fed will hold rates higher on the strength of the economy. The fact that his tone is starting to change has my full attention.

"For well over a year now, I have argued that the US is able to avoid the 2023 recession that many were repeatedly calling. I am now less confident about what’s in store for 2024 given how the recent surge in rates compounds the erosion in financial, human and institutional resilience."

"If congressional dysfunction spreads further, and if the Fed continues to drag its feet on changing key underpinnings of its policy formulation, the turn in US economic surprises will not be pleasant for either the domestic economy or the rest of the world."

On that positive note, have a great weekend.

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