Top of the Street: Elections boost rates, beat up the muni markets

Republican control in Washington has sent the markets scrambling to reset valuations. Rates have jumped. Muni debt has lagged. Meanwhile, banks have tightened CRE. New ideas emerge on banker compensation and new data on US mobility. Contributions from Barclays, DB, FRB, GS. 

Markets: Trump upped rate expectations
The surprise Republican win of the White House last week and continuing control of Congress has forced the markets to reprice. New deficit spending, changes at the Fed, less regulation and potential trade battles all argue in various degrees for higher rates. The magnitude will depend on the details of proposed change and how much of it makes it through the political process. It also will depend on US productivity. Low productivity since the Great Recession has capped potential growth and led even the Fed to project low rates. New infrastructure and fewer regulations could lift productivity while protectionism could limit it. Goldman sees an initial lift to growth but an eventual drag from trade and immigration policy. Deutsche Bank’s guess is that US 10-year rates peak at 2.50% in mid-2017 but finish the year at 2.30% while the spread between 2- and 10-year rates falls from 125 bp today to 80 by at the close of next year. See Goldman Sach’s Economic Implications of the Trump Agenda, 12 Nov 2016, and Deutsche Bank’s US Fixed Income Weekly, 11 Nov 2016. (GS, DB, Milepost).

 Markets: Taxing times for munis
The odds of both individual and corporate tax reform have jumped with last week’s elections and the muni market is feeling the pain. Munis picked up a new risk premium and broadly underperformed Treasury debt last week. The president-elect has proposed lower individual and corporate taxes, a higher standard deduction and fewer other deductions and eliminating the Alternative Minimum Tax. Demand from banks and insurers could drop. Muni debt issued to support non-profit healthcare could also take a hit with changes to Obamacare. See Barclays Muncipal Weekly, 10 Nov 2016. (Barclays, Milepost).

Banking: Tightening credit for CRE
Banks continue to tighten credit for commercial real estate with standards on multi-family leading the way, construction coming next and other loans following. Slightly more than net 40% of banks tightened multi-family credit last quarter, according to the senior loan officer opinion survey released by the Fed last week. Slightly less than net 30% tightened construction lending, and roughly net 20% tightened on other loans. Net demand for CRE lending still looks slightly positive but continues a steady slide. The latest survey results are here. (FRB, Milepost).

Banking: The NY Fed floats the idea of performance bonds for bankers
Bankers would have to wait 10 years to get all of their annual compensation if research posted recently by the NY Fed gets traction. While far from either policy or formal proposal, the note considered the impact of deferring a portion of banker compensation for five years and then allowing it to vest over the next five. That approach would have accumulated $140 million in the case of executives involved in Wells Fargo’s recent scandal, enough to cover most of the bank’s $185 million in fines. “Larger banks should require performance bonds for their senior managers and material risk takers as a way of motivating them to shun misconduct and take better care of our financial system,” the authors write. The NY Fed note is here.

Economy: Fewer movers, fewer shakers
Housing turnover in the US and the mobility of the US population continues a slow decline, according to new data from CoreLogic. The median time between the purchase and sale of a US home has extended from 4.4 years in 1985 to 6.6 years in 2015. And for homeowners that do move, less than 25% move out of the state, the lowest level in at least 15 years. New Jersey, California and Illinois led the list of states having more people move out of state than in. The CoreLogic post is here.