Top of the Street: Elections, (in)vulnerable assets, student loan ABS, CMBS, oil patch banks and rising home prices

A little ink on the election, some on assets vulnerable to rising rates, downgrades in student loan ABS, price tiering in CMBS, credit woes for oil patch banks and solid home price appreciation. Contributions from BAML, DB, GS, JPM, the NY Fed.

Markets: Anticipating the election and beyond
The market since mid-summer has expected a Democrat in the White House, narrow Democratic control of the Senate and Republication control of the House. So only a surprise should move markets sharply on Wednesday. The market has arguably priced the tightening White House race. Equity markets have dropped, business and consumer confidence have slipped. Analysts widely expect a modest equity rally if Clinton wins, a sell-off if Trump. Rates should move counter to equities with most action in short maturities – a flatter curve for Clinton, a steeper one for Trump. Exit polls should show results in the swing states of Florida, North Carolina and Ohio by 8 PM ET and in Pennsylvania, Michigan and Wisconsin between 8 PM and 9 PM ET. Absent a surprise, it’s business as usual – or no business as usual – in Washington. See BAML’s Ready or not: the election, the economy and markets and BAML’s The other 50 states, 4 Nov 2016, Deutsche Bank’s US Fixed Income Weekly, 4 Nov 2016, and JPMorgan’s US Fixed Income Markets Weekly, 4 Nov 2016. (BAML, DB, JPM, Milepost).

Markets: Assets at risk for rising rates
Besides the usual impact of rising rates on discounting cash flows, the Fed worries too about big shifts in relative value if rates normalize. A big revaluation could stop the Fed in its tracks. Lots of assets look rich compared to past levels, but not necessarily after adjusting for today’s current rates. In fact, only 10-year Treasury debt and agency MBS – exactly the stuff the Fed owns – clearly look rich after adjusting, according to Goldman Sachs. The case for equities, housing and commercial real estate looks muddier. Corporate debt looks fair. See Goldman Sach’s Sailing into the Wind of Rising Rates, 4 Nov 2016. (GS, Milepost).

Markets: Ratings shift on student loans
Moody’s and Fitch may finally clear up their view of student loan ABS more than a year after they started revising rating standards. Slow repayment on the federally guaranteed loans prompted both agencies to start revising more than a year ago, with a focus on the risk of missing legal final maturities. Since issuing new standards this summer, Moody’s has taken action on $53 billion in SLABS: 54% downgrades, 42% affirmations and 4% upgrades. Fitch has taken action on $13 billion: 12% downgrades, 83% affirmations and 5% upgrades. Both agencies continue to review bonds but should finish by the end of the year, according to JPMorgan. That could help revive liquidity in that market, which as suffered since slow repayments on the loans surface. See JPMorgan’s US Fixed Income Markets Weekly, 4 Nov 2016. (JPM, Milepost).

Markets: Advantage in CMBS for bank shelves
Investors apparently prefer CMBS deals backed by bank loans more than deals supplied from other quarters, according to JPMorgan. Two deals assembled last week by JPMorgan and Morgan Stanley using only bank loans priced at tighter spreads than deals with contributions from other originators – tighter by roughly 7 bp for the 10-year AAA class. This bank shelf premium has been in the market for years but has grown in 2016, possibly as requirements for retaining risk have come closer and the market views banks as sponsoring more reliable and liquid shelves. See JPMorgan’s US Fixed Income Markets Weekly, 4 Nov 2016. (JPM, Milepost).

Banking/economy: Energy weighs on oil patch banks
Community banks in the US oil patch have seen a spike in commercial and industrial loan delinquencies since oil took a free fall starting in 2014, according to the NY Fed, and other types of credit have shown signs of stress, too. Banks that sourced at least a quarter of their deposits from counties with heavy energy employment saw nonperforming loans rise compared to peers less sensitive to energy. The tally of nonperforming residential and commercial real estate loans, consumer and other loans also signaled a little stress, too. But these other types of borrowers may be slower to respond to the energy crash or more able to adapt. The results highlight the potential gains from diversification, geographic and otherwise. The NY Fed study is here. (NY Fed, Milepost).

Economy: Home prices keep marching on
US home prices rose by 6.3% for the year ended in September, according to CoreLogic, continuing a string of year-over-year gains that started in February 2012. And the company projects that prices should rise another 5.2% in the year ahead. Washington and Oregon posted the largest gains for the year ended in September with both up more than 10%. And the least expensive homes gained the most, up 8.8%, with the most expensive homes up only 5%. A strong labor market and steady home price appreciation have substantially rebuilt the consumer balance sheet from its Great Recession lows. The CoreLogic blog post is here. (CoreLogic, Milepost).