MilePost: Trump versus Clinton, Freddie Mac, the Fed

Markets: Trump versus Clinton
Let the games begin. As far as broad markets are concerned, the candidates will likely be viewed through their positions on spending, taxes, trade and monetary policy. And the two likely contenders differ sharply so far on all of these fronts, according to analysts at Barclays. It’s probably too early to pay attention to the contenders’ positions at this point, however. Positions change. Besides, the Iowa Electronic Markets give the Democrats a 70% chance of winning the White House. If the gap narrows, market attention to policy positions should sharpen. See Barclays Wednesday piece on the election from the firm’s US economics and public policy analysts. (Milepost, Barclays).

Markets: Fannie Mae and Freddie Mac push multi-family lending
Fannie Mae and Freddie Mac’s regulator on Wednesday expanded the amount of multi-family lending the agencies can support this year from $62 billion to $70 billion, increasing the competition for private lenders. The Federal Housing Finance Agency justified the change based on new higher estimates of the need this year for multi-family finance. Issuance of agency-guaranteed loans has surged by 26% this year from $19 billion from Jan through Apr in 2015 to $24 billion this year. (FHFA, Milepost).

Markets: A dent but not a draw at Freddie Mac
Despite a $354 million 1Q16 loss reported Tuesday, Freddie Mac’s $1 billion net worth will allow the company to avoid drawing on its Treasury line of credit. Analysts last week had predicted that a Freddie Mac loss could send the agency hat-in-hand to the Treasury and refuel debate about taxpayer liability and the agency’s future. The agency did take a loss on MBS portfolio hedges, but not big enough to ring the political alarm bells. (Bloomberg) 

Banking: The Fed focuses on energy and CRE lending
Often the Fed tells the market more about its thinking through the questions it asks rather than the answers it gives, and that’s typically the case with the Fed’s periodic Senior Loan Officer Opinion Survey. The latest survey released Monday had special questions about both energy and CRE lending, which presumably are the two areas where the Fed sees the most risk. Most domestic banks reported less than 5% of their loans went to firms in the oil and natural gas drilling or extraction businesses while most foreign banks reported more than 5%. In CRE, the hand-wringing is around the need to refinance more than $200 billion in CMBS loans originated at the 2006-2007 height of the real estate bubble and coming due in 2016 and 2017.  Many of these loans financed aggressively valued properties. “Some banks noted they expect standards for these refinancings to be somewhat tighter than the standards they expect to apply to other CRE loans,” the Fed’s report said. At least among banks, it seems the caution flag is out for these loans. See the Fed’s website for The April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices. (Milepost).

Markets: Going negative
The US has yet to see a meaningful run of negative rates, but that isn’t stopping JPMorgan from imagining the possibilities. The firm’s fixed income relative value team on Monday fired up a new model that that lets interest rates drop below zero. Out five years, the model projects a 21% chance of negative 1-month LIBOR and a 9% chance of negative 5-year swap rates. The new model sees less value in most MBS and callable debt and more value in anything with an embedded floor on rates. With steady negative rates prevailing in EU sovereign debt since mid-2014, models once again have caught up with reality. See JPM’s US Fixed Income Markets Weekly from April 29. (JPM).