Low interest rates, tight spreads and wobbly credit make Morgan Stanley nervous about the muni market. Housing looks good, however, even though rents have lost some mojo. Odds of a Fed hike rebound. And political standstill after November looks likely. Contributions from MS, GS, BAML, CoreLogic.
Market: Bearish on munis
The yield spread between muni debt and both corporate and Treasury curves is at the narrowest level since at least 2012. The short-term fixes in Chicago and Illinois look fragile. And any softness in the economy could add pressure to muni credit. Allocations to muni credit “should be increasingly defensive give decelerating returns, rising risks of economic stress and muni credit deterioration,” according to Morgan Stanley. See Morgan Stanley’s Muni Strategy Playbook: Defensive Driving, 21 Jul 2016. (MS).
Market/economy: Bullish on housing
A low supply of single-family properties - according to the KC Fed, the lowest in 30+ years - affordable mortgage payments and good fundamental demand despite tight credit leave Morgan Stanley bullish on housing. And a recap of agency CMBS highlights an expected $96 billion of issuance this year, a 27% jump over last year as multi-family housing grows. Issuance of private CMBS, however, is down 50% as banks continue to take share in commercial real estate lending. See Morgan Stanley’s Global Securitized Products: Summer 2016 Outlook, 21 Jul 2016 (MS, Milepost).
Market/economy: A slower rise in rents
Rents on single-family homes keep rising but at a slowing pace, according to CoreLogic. The firm has rolled out a novel new index for tracking this market. Rents as of May jumped 3.3% YoY, well below the index’s Dec 2014 peak of 4.6% YoY. Type of property makes a difference, however. Rents in May on the most expensive properties rose only 2.1% YoY. At the low end of the market, however, rents rose 5.3% YoY and continue to rise. See the CoreLogic analysis here. (CoreLogic, Milepost).
Market: Revising Fed expectations
The rebound in markets since Brexit and good economic data keep bumping up expectations of at least one Fed hike this year. Equity has rallied. Credit has tightened. Payrolls have jumped. Housing has come in strong. Goldman puts the odds of a hike at 25% for Sep and 40% for Dec, modestly higher than fed funds futures, which price in a cumulative 50% chance by Dec. The Fed has also signaled willingness to wait longer than traditional rules might dictate since potential growth looks lower than historical norms and premature hikes could raise recession risk. See Goldman’s July FOMC: Better Data Meets Cautious Fed, 22 Jul 2016. (GS, Milepost).
Market/economy: Election expectations
The Republican and Democratic conventions send US electoral politics into the home stretch, but the market is already looking at the finish line. The Iowa Electronic Market gives the White House to the Democrats (70/30), the Senate to the Democrats (54/27) and the House to the Republicans (60/21). Of course, that gives control of Congress to no one. With differences in tax, healthcare, immigration and foreign policy, some analysts are exploring the implications of a surprise sweep. See BoA Merrill Lych’s US Economic Weekly: Election Watch, 22 Jul 2016. (BAML, Milepost).
Economy: Housing rolls right over gaps in mortgage credit
Although the average 30-year mortgage rate has dropped to 3.40% on Bankrate.com, not all loans are equal. The gap between loans eligible for Fannie Mae and Freddie Mac and jumbo loans has widened from 60 bp this spring to nearly 100 bp. The Mortgage Bankers Association index of credit availability has also slowly tightened since November. The gaps in credit have not slowed housing, however. Existing home sales are at their highest level in nine years, new home sales are up, and homebuilder confidence in the NAHB survey is at an encouraging 59. Recapped in BofA Merrill Lynch’s US Economic Weekly, 21 Jul 2016. (BAML, Milepost).